Thunder, lightning on ag’s horizon
EMMETSBURG-Volatility is the word in agriculture in the months and years ahead, and producers will need to fight back with good business plans, modest living and a better understanding of world economics, said Dr. David Kohl, professor emeritus of the Department of Agricultural and Applied Economics at Virginia Tech.
Kohl spoke at Ag Education Day on March 12 in Emmetsburg, sponsored by the Kossuth-Palo Alto County Economic Development Corporation.
He said he sees a future in agriculture, but producers will need to make better use of cash flow, better decisions and make an effort to learn the new technology that’s becoming the new face of farming.
“The easy money is gone,” Kohl said. “You need to concentrate on getting better before getting bigger.
“By the year 2050 we’re going to need 70 percent more food, fuel and fiber, but we’re only going to be using 70 percent of the resources we’re using today.”
He said 94 percent of the customers in the world are outside U.S. borders, and that producers are going to have to understand global consumer demand and global economics.
He said profits are to be made, but that the top 20 percent of managers will earn a 10 percent rate of return on assets. The bottom 20 percent will earn only 1 percent or will have a negative return.
He said those producers would stay in business only if land values increased.
“We’re entering a different era where we can’t depend on asset appreciation to carry us,” Kohl said. “It’s going to be about cash flow and profitability, and it will be critical.”
He said agriculture is witnessing the coming together of biotechnology, information and engineering to make it a more complex business.
Because of that, he said older producers should take seriously some of the knowledge of the younger generation in order to remain profitable.
Give youth a chance
Kohl encouraged older producers to give younger farmers a chance.
“If you can find a young person with knowledge of technology along with the old-time work habits, you’ve got a winner,” he said.
Kohl said diversification will be key to staying profitable, saying those who grew their operations too quickly will soon feel the bump in the road.
He urged producers of all ages to get their financials in order.
“This will not be business as usual – you’re going to need to know what’s going on, especially as (more) regulators will be regulating us (more),” he said.
Kohl said Germany and France are currently struggling because of strict government regulations.
With narrow profit margins it will be important to meet with lenders to work over financial scenarios, calculating how much money is projected to be made or lost-and if there will be financial losses, to determine how long a producer can operate before “burning through” all working capital.
Kohl said energy is a major player in world economics – enough so that all farm families should have an energy plan.
“Did you know that eight of every 10 dollars you spend on the farm or ranch is connected to oil?” he asked. “You will need to watch the strength of the dollar and the duration of the strength of it.
“T’will be your 18 percent interest rates of the 1980s. It will be a game changer.”
He said the 1980s resulted from a credit bubble, but that the agricultural economy suffers today from an asset bubble, which he said takes longer to correct.
Kohl said producers need to have lenders who understand the global economic role that weather plays in the northern and southern hemispheres.
“If your lender doesn’t think it’s important, you need to get a different lender,” Kohl said.
He said a one-year downturn cycle affects repayment ability, two- to three-year cycles affect repay and liquidity, and a three- to five-year cycle affects both plus equity.
Land is changing hands, cash rents following high commodity prices have turned farming into a “game of chicken.”
Kohl said young producers have never faced a downturn in the ag economy, but said they should now prepare themselves to get “punched in the mouth.”
His advice to them is – know their financials and have a good relationship with a lender; live within their means; find ways to cut corners to improve profitability; diversify; surround themselves with good suppliers; identify five people to whom they can go to keep their attitudes up, and attend seminars.
Kohl said producers need an economically viable livestock industry in order to have an economically viable grain industry.
This means the U.S. needs to concentrate on satisfying the needs and wants of global customers on both commodities.
He said China exceeds the U.S. in purchasing power parity. Russia is quick to play its oil card. Brazil suffers from slow economic growth and a socialist agenda.
Argentina’s ag leadership issues stem from poor infrastructure and a president who does not support agriculture.
“Don’t bet the farm on trade with China,” Kohl said. “China will give you the market, and they will take it away.”
Kohl said some economic indicators to watch include unemployment over 5 percent, and a gross domestic product growth of more than 2.5 percent.
Both of those instances, he said, would make the federal reserve consider raising interest rates.
He said farmers should watch copper prices, follow factory lay-offs, and the downturn in the housing market, indicating millennials are not buying homes.
“The millennial generation will drive consumer trends and politics,” Kohl said.
Kohl said volatility creates opportunity, but producers will need to be proactive.
“It’s going to be a big game,” Kohl said. “You’re going to have to have a lot of stretch in your pants and be able to manage around all those things you can’t control, and you better have a business plan that talks to your farm.”
From the human standpoint, Kohl told producers they should surround themselves with good people, be resilient, and that older producers should help younger producers get started.
“You need to help the next generation,” he said, saying that a large percent of American farms have no younger generation wanting to come back and farm them.
“But you need to be selective on whom you choose,” Kohl; said. “Every one of us in this room had someone else who helped us get started.”
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