How to Create Long-Term Growth During a Down Economy
The agriculture sector has seen an industry-wide shift toward an efficiency-based supply model. This approach makes sense during normal economic conditions and can reduce costs, but it can also potentially make your business more fragile during a down economy.
To address today's challenges, it's essential to invest in agriculture finance and production strategies that can help create sustainable long-term growth even in periods of economic uncertainty.
Economic problems in agriculture
The agriculture sector was already facing some tough economic conditions before COVID-19. Food prices and consumer demand can change overnight. The agriculture sector is also vulnerable to extreme events, such as natural disasters and government tariffs.
Despite these constantly changing conditions, the agriculture business model is hard to adjust quickly, as many crops follow a year-long cycle. Even if circumstances shift, it's not easy to go back on an investment.
More recently, COVID-19 has created even more uncertainty. Consumer demand has changed dramatically due to economic restrictions to help stop the spread of the virus, and agribusinesses have had to adjust operating procedures to prevent outbreaks among employees.
Rethinking supply chain efficiency
Agriculture businesses need a supply chain system that's built to withstand these economic problems. Many have prioritized an efficient model with the goal of reducing costs wherever possible. Given that agriculture is such a price-sensitive industry, this approach can be appealing. Farms that reduce their costs can increase profit margins.
Some methods in this model include working with the lowest-cost suppliers, using equipment as much as possible to prevent lost capacity and avoiding excess inventory to cut down on storage costs. Some businesses even specialize in one crop to achieve economies of scale.
However, efficient supply chain models aren't always the most resilient. They rely on the entire supply chain working smoothly, such as with just-in-time inventory restocking. Any supplier delays could cause a farm to miss out on equipment, seeds and tools during a crucial moment in its harvest.
Economies of scale also tend to put all a business's eggs in one basket. With no room for error in a down economy, a supply or demand shock can bring down an otherwise successful operation.
Resilient supply chain strategies
To deal with the increased economic uncertainty, consider shifting to a more responsive supply chain system. One place to start is by making a list of all vendors and identifying potential weak points. For example, if you only have one supplier for fertilizer because they have the lowest price, and something happens preventing them from delivering on time or at all, you'll need backup options.
It may be worth taking on additional suppliers to complete orders, rather than focusing on just one, even if it's a little more expensive. Finding and contacting secondary sources means the relationships are established before a disruption happens.
It also could be a good time for to increase stockpiles of essential supplies, as disruptions to just-in-time shipping are more likely to occur in the COVID-19 era. Consider how you'd respond to various shocks, such as a key vendor going bankrupt, so you have a backup plan ready to go.
Weathering a tough economy
Besides addressing the supply chain issues, there are some other steps you can take on the operations and agriculture finance side to create a more sustainable business model. Diversifying crops could be a good long-term plan. That way, you can offset a sudden change in demand for one area, such as a fall in soybean purchases, with higher demand in others.
Consider how to diversify your customer base as well. For example, you might look to increase local sales at farmers markets on top of serving larger corporate clients.
If your business currently has outstanding farm loan debt, consider refinancing to take advantage of lower interest rates. That way, you could reduce monthly payments and free up cash flow.
During periods of economic slowdown, the name of the game is hanging on. Eventually, recessions end. By creating a more stable supply chain and focusing on more sustainable business practices, you can establish long-term growth for your agriculture business even in a down economy.
Financial insights for your business
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.