Earlier this week, I had the opportunity to attend the International Dairy Foods Association’s Dairy Forum, which in my opinion, is the dairy industry’s premier annual meeting. The conference covers a broad swath of topics, but always provides a close look at the evolution of the political environment and an extrapolation of what it means for the US and global dairy sectors. As you might expect, this year provided much food for thought. As industry experts preached their perspectives and the hallways filled with attendees debating their merits, one theme became abundantly clear. Uncertainty will be the name of the game for the global agricultural economy in the coming years.
As business stakeholders, uncertainty is worrisome. Our businesses thrive on consistency and planning. When we don’t know what to expect, we can’t ensure that we are making the decisions that will optimize our operations. Uncertainty is not the same thing as risk. As I see it, risks are unilateral factors that can influence results within a specified context. Risks can be acknowledged, and in some cases, managed or mitigated. But uncertainty is a more fundamental unknown of the framework within which we solve problems. For example, say we are trying to plan a route to drive between two cities. Risk factors might include traffic, weather conditions, or road repairs. But uncertainty might be not knowing which two cities we are trying to drive between – a much more central lack of situational context which will undermine effective decision making.
I think we are all well aware that the world is undergoing a fundamental change. In today’s post I’d like to discuss a few of the key concerns for the agricultural economy and explore strategies for coping with this new environment of uncertainty in which we find ourselves.
Uncertainty in Politics
Shifting political environments in the Western world have brought new and unpredictable leadership into power. These changes have also brought a new Secretary of Agriculture to the United States. The day prior to his inauguration, President Trump nominated Sonny Perdue for this job, his final cabinet pick. Compared to the other cabinet selections, Perdue seems to be a relatively conventional choice. He is a veterinarian by training and served as the Governor of Georgia from 2003 to 2011. Given his track record, he is expected to try to reduce regulation in agriculture. While many industry groups and trade associations support this position, and applaud the nomination, he is vehemently opposed by environmental groups. At this point, his confirmation seems likely.
What will be most interesting to watch over the coming years will be the convergence of the administration’s policies with the interests of rural America. For example, American agriculture has benefitted greatly from trade and immigrant labor. In fact, the American Farm Bureau estimates that over half of people currently working in agriculture are illegal immigrants and their removal would mean industry losses of up to $60 billion dollars. Many of the immigration and trade policies currently proposed by the government’s leadership have the potential to seriously damage the farming sector – an important part of the population that helped get President Trump elected. It remains to be seen if the new Secretary will have the spine to go toe to toe with the President on the issues that could make or break rural America in the coming years.
During Perdue’s tenure, he will oversee the completion of a Farm Bill, currently scheduled for 2018. This vast and contentious law regulating the lion’s share of the country’s food and agriculture programs. The Farm Bill covers commodity support programs, including the Price Loss Coverage program and the Agricultural Risk Coverage program, among others. The renegotiation of these programs may be another point of conflict since the administration has generally implied that they intend to limit government spending. Perhaps at greatest risk are the nutrition programs in the bill, including the school lunch program and SNAP, colloquially known as food stamps. These nutrition programs accounted for 77% of the 2014 Farm Bill budget but many conservatives have expressed a desire to limit these programs.
Much has been said about regulations and the administration’s intention to reduce regulatory burdens on businesses, including those in food and agriculture. On January 30th, President Trump signed an executive order dictating that for every new regulation implemented, two more must be repealed. While this has a nice ring to it, I have doubts about the practicality of this measure. With the exception of truly antiquated regulations it will not be easy to identify and strip measures which are currently in place. As a result, my guess is that few new regulations will be enacted in the coming years. And while this may be by design, I believe that the rigidity of this rule means that we may miss the opportunity to implement logical, sensible rules that could genuinely improve the world we live in.
Uncertainty in Trade
One of the biggest threats to the agricultural economy is the uncertainly surrounding the future of the US role in international trade. Trade has been an important part of America’s agricultural success story and today US food and fiber products are shipped all over the world. The rollback of trade agreements will result in a loss of market access and a diminished consumption opportunity that will directly impact farmers. We would be foolish to think that these customers will not look elsewhere to fill their needs. The other global agricultural superpowers are anxious to move in and fulfill the needs that will be vacated by the US moving out of trade agreements.
Probably the most visible trade agreement on the chopping block is the North American Free Trade Agreement (NAFTA). NAFTA took effect on January 4, 1994 and is actually made up of a series of bilateral trade agreements between Mexico, Canada, and the United States of America. Agriculture has probably been the biggest winner in the agreement and, with some important exceptions, agricultural products flow between these countries without tariff barriers. The Trump administration has expressed its determination to renegotiate the agreement, particularly as it pertains to Mexico. In 2015, agricultural exports to Mexico totaled $17.7 billion dollars, an increase of roughly 400% since the agreement was signed. I struggle to see a way that the agreement could be renegotiated without losing an important market for US agricultural products.
While the most attention has been paid to NAFTA, the tectonic plates are also shifting in other parts of the world of international commerce. Within the first week of his presidency, Trump withdrew from the Trans-Pacific Partnership (TPP), which would have improved trade access to 11 other nations. There has also been a lot of rhetoric surrounding trade with China, and more recently even Australia. It is important to bear in mind that the flip side of reduced exports is that imports will be reduced as well. However, in my opinion, many agricultural imports correspond to products for which the US does not have a competitive advantage to produce. As a result, net efficiencies are gained by keeping these markets open. It remains to be seen how these trade agreement revisions will ultimately play out, but the bottom line is that the next few years will likely result in reduced opportunities for agricultural products abroad.
Coping with Uncertainty
Now that we understand a bit more about the uncertain environment in which we will exist, the challenge becomes adjusting our business strategies to survive and thrive. There are several important steps that business men and women can take to maximize their opportunity for success:
1. Define Your Objectives
2. Focus Inward
3. Consider International Locations
Before deciding precisely how to adjust one’s strategy, it is critical to achieve unparalleled clarity around business objectives in the current environment. Is growth a priority? Is the focus on improving operational efficiency? What percent of revenues and profits should come from domestic or international sales? Understanding the business’ ambitions is the first step to choosing the proper path for the company in the coming years.
While every company culture has a different level of comfort with ambiguity, in an uncertain environment it is virtually impossible to perform proper analyses surrounding where and how to invest. Assuming it is aligned with the company’s objectives, many companies will want to take advantage of this time to focus inward, improving operations and efficiency, rather than attempting investments targeted toward expansion. Once a greater understanding surfaces of how the next few years will develop, companies can begin to once align their resources with opportunities that provide the greatest opportunity for growth.
For companies that are focused on growth, and especially those who have an international presence that they wish to protect, this could be a good time to focus on investing in other countries. Prioritize locations that provide some type of production advantage, while also providing advantageous, or at least unfettered, access to key markets. In addition, the current strength of the US dollar could provide some benefits when purchasing assets abroad. For those who are not willing to take the full plunge abroad, this is a good time to consider partnerships with foreign firms that may provide additional access without the full investment required by an acquisition or a greenfield.
It is safe to say that nobody knows exactly what is going to happen over the next few years. Business owners will be forced to manage their organizations in an environment of significant uncertainty. There is no need to be pessimistic – sometimes moments of extreme change result in the proliferation of new opportunities. But in the meantime, it will be critical that strategists and operators take the steps necessary to ensure that their company can continue to find success in this new environment.