With the great commodity super cycle of record profits now over, I am frequently asked when prosperous economic times will return. Well, it appears that the years 2016 to 2020 will represent an economic reset for most commodities. Moderating economic growth in emerging and global economies, softening of the biofuel ethanol mandates, decreased oil prices, and a strong dollar are each headwinds that will deepen the economic reset. How will the economic reset cycle evolve? Drawing from observations of the 1980’s downturns, there will most likely be specific, distinct stages of the cycle evolution.

First, 2013 to 2015 represented the “hope and complacency” stage. In terms of net worth and equity, financial balance sheets were strong which tends to diminish any sense of urgency. However, remember that equity does not pay the bills or service debt.

Analogous to a baseball game, these early innings of the economic reset will exhibit distinct financial characteristics. Expect negative margins and debt service coverage ratios under 100 percent along with requests for extension on operating loans. Values of used machinery and equipment will decline. In my travels, I see used equipment prices adjusting downward 20 to 50 percent. In addition, equipment dealers throughout the U.S. face inventory buildup.

Next, businesses that were in aggressive growth mode during the great commodity cycle are now confronted with significant financial issues. While pursuing expansion, many producers invested their increased profits in fixed assets, such as land, at elevated prices. Some producers committed to higher-rent, long-term leases assuming current profits would continue. Others leveraged farm and ranch businesses and existing assets and equity in order to quickly capitalize on economic conditions. Simultaneously, these producers neglected to reserve enough working capital or liquid financial assets for an economic entrenchment, which is now occurring. The businesses and producers most vulnerable to the current reset are those specialized in grain without sources of diversified revenue.

As we acclimate to this game of economic reset, it is important to utilize available resources to re-position your business for difficult times ahead. The impact will only spread as economies across the globe continue to face challenges. However, remember that economic reset also brings opportunity. Examine your business to identify ways you can preserve capital and build up an economic buffer. Next time, look for a discussion of the later innings of the reset game.