The Impact of Inflation on Agribusinesses

Price risk and volatility are nothing new to those in agribusinesses. It’s the nature of the operation when you’re working in a commodity-centric industry. Nonetheless, it’s been decades since we’ve faced a general wave of inflation like we experienced in recent months – which was further complicated by supply chain issues and labor shortages. It’s unclear how long these trends will persist, but what is clear is that businesses must adjust to successfully navigate the new environment. So, how can you do this?

Take a creative approach

Most agribusinesses are closely tied to commodity markets, which limits your ability to simply raise prices or cut costs in response to inflationary pressures. Leaders must be creative and have a critical eye toward the entire business process. At times like this, it is necessary to consider other aspects of a business where there is room to exercise control. One example is re-negotiating agreements with key business partners to determine if there are opportunities to adjust the timing or volume of purchases to qualify for a better pricing bracket. Another example includes negotiating locked in prices for an extended period of time to better manage price risk.

Adapt a decision-making process

Business owners should reevaluate how they measure success in this new landscape. Most decision makers understand the time value of money concept; cash today is more valuable than cash at some future date. However, after years of low inflation and low interest rates, this component has often been neglected or ignored when evaluating business decisions. With inflation trending near 8% and interest rate increases beginning to take effect, this should be a major consideration in your decision-making process. Business owners should consider what is an acceptable return on investment for new projects. In addition, think about how one rate of return compares to the return on existing assets. As well, consider if your business is on track to meet longer term goals.

Navigating a tumultuous supply chain

Across industries, pandemic-related disruptions and recent world events have cause companies to reconsider their just-in-time supply chains. In many cases, these dynamics have changed the customer-supplier dynamic and shifted the negotiating and pricing power in favor of suppliers. Again, businesses must adapt.

It’s more important than ever to establish strong relationships with your key suppliers. Communication is crucial to making sure you’re at the top of suppliers’ lists when a highly sought after product finally comes in. Receiving accurate lead times and alerts of price increases can help companies adjust and respond appropriately. Build flexibility in your processes to account for unexpected delays or even alternative products. As the balance has shifted to suppliers, it may be worth exploring a buying group or other strategies to increase your purchase power.

Keep in mind, the same supply chain frustrations your business has encountered pose challenges for your customers. By maintaining open lines of communication here, it’s possible to not only retain those customers, but potentially strengthen the relationships.

Focus on a strong balance sheet to position for opportunities

High prices and a tight labor market have strained the financial position for many businesses. In this environment, it’s important for companies to shore up their balance sheets. Having the liquidity and financial strength to take advantage of unexpected buying opportunities or other transactions can have a significant impact on profitability and long-term success. Again, communication is critical to ensure your lenders understand the business’s cash flow needs. It can take time to process changes to a line of credit or secure new financing. Have these conversations with your lenders early and expect more questions and scrutiny, as they, too, are adapting to this new environment. It might also be a good time to evaluate your interest rate exposure with your banker as rates begin to rise. Does an instrument like an interest-rate swap make sense to manage the risk of higher rates?

Most importantly, focus on the fundamentals of maintaining a strong balance sheet. Ensure receivables are collected timely. Maintain tight controls over inventory, and limit waste. Manage purchases of inventory, supplies, and equipment and consider the impact on your business’s cash flows.

Key takeaways

Business practices can grow complacent in times of ample supply, low interest rates and minimal price pressure. The current trends can be challenging for businesses, but there is a lot of opportunity for those that can adapt to the new environment and position themselves ahead of the competition. Contact us if you have any questions, and we’ll be in touch.