Black swan” is a metaphor to describe an unpredictable, widespread but exceptionally rare event that takes everyone by surprise.
It’s a term often used in agriculture to describe unique events like the dust bowl of the 1930s when drought ravaged the agricultural industry in North America. Without question, the COVID-19 pandemic qualifies as one of these events.
David Kohl is professor emeritus of agricultural finance and small-business management and entrepreneurship in the department of agricultural and applied economics at Virginia Tech, Blacksburg, Virginia. He spoke about the current black swan event in his keynote address during the Ag in Motion Discovery Plus virtual farm show this past July.
Kohl outlined the origins and the potential outcomes of the COVID-19 crisis, specifically in how it relates to the agricultural economy.
He sees this black swan going through three distinct phases. Building on the avian nature of the metaphor, he named the three phases, the dirty bird, the angry bird and the phoenix. We currently sit in the second, angry bird phase.
The dirty bird, occurred from early March, to mid-May. The phase was characterized by shock, numbness, anxiety and massive job losses. Kohl pointed out that in western countries, 50-70 per cent of the economy is consumer driven and during this early phase, in certain sectors of the economy (hotel, airlines, etc.), consumer spending had dropped to essentially nothing.
“Basically, the global economy was put on life support,” Kohl said.
The second phase began around May 15 and Kohl predicts it will run into 2021. This angry bird phase has been (and will continue to be) characterized by a disjointed recovery, many business failures with increased blame, confusion and frustration. Kohl says that during this phase we will come to the realization of what these job losses really mean. Many may not get their jobs back and those who do may be making significantly less than they had been making.
He also predicts an intensified deglobalization conversation that will have a direct impact on agriculture.
“The trade sanctions and trade issues of the past couple of years were just the precursor of what may occur in the future,” said Kohl. He sees extreme volatility and it will take managers with a high business IQ to navigate through and capitalize on that volatility.
However, it’s not all doom and gloom. He also predicts that there will be a shift to collaboration, critical thinking and thinking about unintended consequences when planning.
Naturally, the phoenix phase, like the mythical bird, is about rising from the ashes of the earlier phases.
Some businesses are already there but for others, it may occur in 2021.
“I see a number of young people and young leadership assisting us there,” Kohl said. He imagines new business models emerging but it won’t be without conflict.
“It’s going to be big business versus small business,” Kohl said. “Terms you’re often going to hear are consolidation, concentration and cannibalization.”
You often hear economists talking about the pandemic recovery curve and whether the recovery will be U-shaped, or V-shaped. Kohl sees the recovery curve as a “Nike Swoosh with jagged edges.” He said he expects it to be a long and painful recovery.
But Kohl says that businesses can mitigate some of that pain as they navigate back to recovery. To successfully make it through to the phoenix phase, Kohl says agricultural business managers will require four traits.
The first of these is ‘resiliency.’ The key to this pillar is knowing your costs of production and a sound marketing and risk management program. “Having the capital equity and borrowing capacity is going to be very critical for building in resiliency,” said Kohl.
The second pillar, Kohl calls ‘agility.’ “Working capital is going to be really critical because it gives you that agility to be able to capitalize on opportunities,” he said.
Kohl’s third pillar is being “entrepreneurial and innovative.’
“Entrepreneurial means aligning with rapidly changing marketplaces.”
In 2020, this changing marketplace will be based on quarterly sprints and examining your business periodically to achieve sustainability beyond 2020.
The final pillar is the need for a strong ‘business IQ.’
“A lot of folks will ask me the difference between this event and the 1980s, where we had struggles in the agricultural industry,” Kohl said.
Kohl says that while the struggles in the ’80s took out a lot of average and below-average production managers, this event will take out a number of average, or below-average business managers. The ability to plan, strategize, execute and monitor is going to be critical to get through this black swan.