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Banker advises ag to control what’s controllable

TAGS: Business
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Balance sheet structure, leverage, leadership and mental health among key factors to weathering current environment.

The impact of COVID-19 is hitting the agriculture industry from all kinds of angles, Nate Franzén, president of the Agri-business Division for First Dakota National Bank, stated during a recent National Pork Board webinar.

From foodservice sector closures, supply chain disarray, packing plant labor and operational issues to altered consumer behaviors due to stay-at-home orders, no stone has been left unturned.

One such example has been seen the ethanol industry.

“As of this week, we’re operating at about 50% of capacity in our ethanol plants,” Franzén said. “So, if you really think about that, that’s a tremendous drop in corn demand from the ethanol industry, driven, of course, by changes in consumer activity.”

Recent estimates showed that gas demand is down 35% year over year. “People are at home and social distancing, and we’re not burning that energy,” he said.

Scenarios like these have changed Franzén’s once hopeful post-pandemic outlook. On the early side of the pandemic, he believed that the economy would have a V-shaped recovery, but as time continues to pass and assessments are made, he said he is “becoming less optimistic that that’s in the cards.”

“I think consumer behavior is changing; I think consumer behavior will change. Some of that may not be permanent or forever — that’s a long time — but I think we’re going to have quite a tail on this economic environment,” Franzén said.

As people reflect on their behaviors prior to this pandemic, “we’re going to have to keep our eyes and ears on those consumer behavioral trends coming out of this, because I do believe the new normal will be different than it was ahead of all of this,” he added.

The best recommendation Franzén has for agricultural producers right now: Control what’s controllable.

“There’s no doubt, in this environment, it’s really easy to get caught up in all the noise out there in the media. There is so much information coming at us, and the real challenge is: What information is really material to me and my operation, and what information is less material?”

The folks who manage through this the best are going to weather the storm the best, he added.

So, what are the controllables? Franzén said he always starts with balance sheet structure, “because that’s your staying power through any cycle in agriculture.”

Working capital is so critical, he said, adding, “Is there anything you can do today to bolster working capital? If there is, I think you need to be exploring it; you need to be having that conversation with your lender and with others of how you do that.”

According to Franzén, the next item to look at would be the operation’s leverage position.

He explained, “If you happen to have had some tough timing where you expanded or grew on the front end of this and you’re in a more highly leveraged situation, I think you have to have very serious conversations today about: What can I do about that, and what are my options?”

Interest rate risks would also typically be something to assess, and this may actually be a bright spot right now, Franzén said.

“With the Fed dropping rates as they have, we’re sitting at interest rate options that are as low as in history," he said. "I think that’s a real opportunity for producers out there to manage that interest rate risk [and] lock in some very rates and terms in this environment, which gives you some protection on that leverage that you do carry in your operations.”

Whenever the economy is in a “black swan event” like it is currently, Franzén said he looks to equity preservation and what the key risk indicators (KRIs) are in a business beyond the performance and production indicators that are monitored every day in a normal environment.

“What can you do to preserve your equity and maintain core equity, maintain that working capital level I touched on a minute ago? Those are going to be vital for you as you’re managing through the curve balls being throw at you right now,” he said.

On the income and expense side, Franzén said producers need to know where they are financially and need to be running scenarios for the best case, worst case and most likely.

“Unfortunately, in this environment, those things can change rather dramatically week to week, month to month, maybe even day to day sometimes,” he noted.

Producers who are really tracking numbers closely and can adjust them in real time or as close as to as real time as possible will have a distinct advantage over others who aren’t in a position and don’t have systems in place to track those numbers and measure them, he said.

“Once you have those projections, those budgets, those plans, really track what’s actually happening compared to what you thought would happen, because it’s going to point out areas and things for you to make tweaks on along the way," Franzén said. "The sooner you identify those and the sooner you make those management decisions you need to adjust, the better for your business, the more you’re going to preserve equity, the more you’re going to maintaining working capital and the better chance you have to getting through the challenges ahead.”

Using a baseball scenario, Franzén said to focus on singles and not home runs.

He added, “There may be some home runs down the road, but I think today, we really have to think about the singles, and quite honestly, in some cases, we’ve got to think about: How do we avoid striking out?”

Last, Franzén touched on the two essential factors of leadership and mental health.

“Leadership is important to any industry, to any business, at any time, but no more so than times like we’re in right now,” he said. “There’s lot of uncertainty, there’s lot of stress, there’s lots of fear out there in our stakeholder team, our employee team and just in our families.”

The better leadership an organization has, the better the chance they’re going to maneuver through these challenges and come out the other side in as good a position as possible.

Having a forward-looking plan instead of a rear-looking plan is critical in the current environment, Franzén added.

He said not to be afraid if you don’t have all the answers but just “be real, be sincere, know your vulnerability; that’s okay.”

In the uncertainty, he recommends surrounding yourself with the best people you can, and “communicate, communicate and communicate.”

Still, stress will pile up on certain individuals, making mental health a very real problem in this environment.

“Communicating, seeking advice and reaching out for help is a strange, not a weakness,” Franzén said. “A lot of times in agriculture, we’re so independent [that we think] we’re just going to put our head down and barrel through. That’s not always possible, so don’t be afraid to lean on others.”

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