Continuing Headwinds – Your Consumer and their Behavior
It’s part of any industry: economic factors can have an effect across many segments. Agriculture and dairy farming are not different. There are some bright spots across the dairy space, but let’s take a look at where we’ve been since lumber hit a high of $1,711 in May of 2021.
Inflation Across Industries
Who would have thought? Now the focus shifts to rising energy prices and the impact on the economy. At $80.64 per barrel for WTI on October 12, rising energy prices were a distant thought 12 months ago. Also, natural gas futures on the front month at $5.37 have certainly raised some eyebrows. Keep in mind, WTI oil prices were at $38 per barrel 12 months ago. There’s a lagging/dragging effect, and you have to ask - what impact does this have?
For example, cotton prices have surged 43% year to date. It was a strong enough topic that Levi Strauss addressed in their last shareholder update. Not exactly-food related, but how does the inflation factor affect your business?
At this point I think it’s safe to say that inflation has proven to be a more durable factor versus a spot in time. In looking at some other factors, let’s think about the contributing causes and what mitigating factors or offsets could change the dynamics.
In particular, the U.S. was supposed to be energy independent but as most in the commodity space know, supply and demand are generally the main drivers. It’s hard to pinpoint the exact reasoning for energy supplies. But look at China for example: the major coal user hit a 10-year low in coal supplies in August. They in turn relied on natural gas, which had an impact on natural gas supply and a ripple effect across the globe.
Enough on energy and inflation – just be aware of the impact on the consumer and the overall economy. We’ve had an extended climate of extra dollars in consumer hands -- how much of that has been spent or saved? The consumer drives almost all decisions manufacturers, marketers and suppliers make. When there is concern due to other considerations in the economy, what impact does that have on spending habits? Dining out, cooking at home, ordering online - they all have an impact on the products you sell and the channel those products travel. While not related to food spending, read up on what is happening in child care and costs associated with it. It’s a small part of the spending stream, but now wrap that up with higher energy costs, higher housing costs, the overall impact of inflation and the value of the dollar, and consider where food spending comes in.
In regards to any corrections, I think the supply chain will dictate the future direction of inflation and how soon or far off we can expect normalcy. While shipping prices have seen a correction in the last two weeks, we’re still close to record prices for goods shipped into the US. That also ignores the fact that many products we all depend on are in limbo - either late, short or not available. The next situation to consider is how do any supply chain issues affect your own business? What do rising prices do to your sales and when can we expect some normalization? Ultimately the consumer drives your business and either an increase or decrease in sales. Understand the factors that the customer has to consider and plan your production and sales from there.
Lastly, we'd be remiss if we didn’t about labor or the fact that every business, everywhere seems to be challenged with a labor shortage component. If you’re one of the 1% who has significant labor, I’ll buy all the drinks necessary to learn how you do it. If you’re part of the 99% that have a continued challenge in finding qualified help, you’re not alone. The US added 194,000 jobs in September, well below expectations of 500,000. We have a labor participation rate of 61.7% in September versus a pre-pandemic level of 63.3%. Keep in mind August job openings were at 10.44 million, down from 11.1 million in July. Some key takeaways I share with my clients are this:
- Take care of your workforce. You’re in tighter competition than you may think with others for those team members.
- Think outside the box on your business model the next 12-18 months. If nothing else the pandemic has shown how demand can change on the fly. What is your market? Who is your market? And what may they want not today, but tomorrow? Be ready.
- Are you prepared to innovate or adapt? Those that were able to shift on the fly, build the plane in the air, flip the switch, had some of their best years ever.
- Build a team around you to consult with: lenders, attorneys, consultants, CPAs and peer groups. There’s so much education and knowledge out there that’s free to leverage - take advantage of it!