Another year has arrived. The world did not end on Dec. 21, 2012, as predicted, our politicians have kicked the can down the road to avoid the fiscal cliff and the sun still rose on Jan. 1, 2013. Let us examine some of the domestic and global variables that may influence your decision making in 2013 and beyond.
It has now been six years since the Great Recession. Its epicenter was here in the U.S., but economic tremors were felt around the world. With most recessions of the past, we would expect the economy to be going full speed ahead by now. Not this time! Large areas of the world are engaged in a Japanese-type of recovery, experiencing long-term stagnation.
Expect Eurozone GDP to grow at less than 0.5% this next year with economic slowdowns in Germany and France, and the PIIGS (Portugal, Ireland, Italy, Greece and Spain) continuing to contract, similar to the past half-decade. Angela Merkel, Chancellor of Germany, will be up for reelection in September 2013, which will be critical. Her reelection will be a strong element contributing to the continuation of the Eurozone. A Eurozone breakup could put these economies into an economic depression-like state. This will place more pressure on Germany to assist on the periphery of Europe’s economic problems, which will lead to political and public discontent. Germany’s recent Purchasing Manager Index (PMI), which is below 50, suggests that their economy is slowing fast.
The emerging nations, i.e. the BRICS (Brazil, Russia, India, China and South Africa) and KIMT nations (South Korea, Indonesia, Mexico and Turkey), will continue to have headwinds in their economies because of the economic sluggishness of Europe, Japan, and North America. The emerging nations are expected to grow at 4-6%, or four times faster than the developed countries. The hope for the emerging nations is China, the world's second-largest economy. China has issued stimulus and their recent PMI was well above 50 for the second consecutive month, suggesting an expanding economy; however, it is not growing at the double-digit GDP growth rates of past decades. In China, watch for margin compression of its companies, wasteful government investment, and inventory buildup that cannot be sold to Europe and North America.
The U.S. economy will continue to have issues with broken political processes. The ineptness of politicians, failing to act on structural changes in spending, taxes, and the mounting debt issues, will require the Federal Reserve to continue to provide an economic stimulus bridge. However, the Federal Reserve does not have a transparent exit plan, which could result in issues down the road. Eventually quantitative easing, or printing money, will have some ill-timed impacts on the U.S. and world economy.
On the bright side, the housing sector, which represents one of every seven jobs in America, is making a steady comeback. When housing starts creep above 1 million annually, this will be a sign of a full recovery.
The energy sector is another bright spot in the U.S. economy and rural America. The question will be whether political decisions in 2013 favor unconventional energy sources, such as solar and wind power, or the traditional sources of gas, oil and coal to be the path for America to be self-sufficient. The U.S. is nearly self-sufficient in natural gas. The U.S currently produces 6.5 million barrels of oil a day and this amount is sharply rising, while importing 9 million barrels/day. This could be a pivotal year in the drive to be energy self-sufficient, with politicians playing a large part in the decision. Watch for our neighbors to the north in Canada to form closer ties with China to supply natural resources, particularly energy, to a growing element of demand in that country.
This year will be a year of higher taxes for most businesses, and more intense regulation from all levels of government. Charges for Obama Care, payroll taxes, higher income tax rates, and increases in real estate taxes in areas of rapid appreciation in farmland values will be drags on cash flow.
What Farm Businesses You Do?
As managers of farm and ranch businesses, what can you do?
Have a focused strategy with more emphasis on tail risk, or unusual risks at both ends of the spectrum. These tail risks could be variables that present tremendous opportunities or they could contribute to your detriment.
Mother Nature will continue to play an important role in agriculture. Sufficient rain and adequate growing conditions globally could result in prices that could quickly evaporate margins in the grain and fiber sectors. Insufficient rain, on the other hand, could be a game changer for much of the global livestock and poultry sector.
A skill gap is emerging in all segments of agriculture. With the increase of technology use and more sophisticated scientific systems, not having the right people on your team could have dire consequences. Cheap labor is being replaced by highly skilled people both inside and outside your business who need to be retained. People in agriculture must solve these talent gaps by working with our institutions of learning. Many of the leading agricultural companies are creating their own “universities” as a method to close this gap.
Increased financial regulation will be the word on the street for 2013. Lenders will require more financial documentation, so farmers and ranchers should be prepared to be more transparent in working with your lender. Prepare for a currency roller coaster as many central banks worldwide have the printing presses working full-bore. This could create more volatility that will require prudent debt and liquidity management with cash flow scenario planning.