by Dr. David M. Kohl, Professor Emeritus, Virginia Tech, Blacksburg, VA
Traveling in many states and interacting with producers and lenders from around the globe finds many different insights and perspectives. Let’s discuss some of the current trends being observed and critical actions for success.
The agricultural economic landscape is definitely in transition. The great commodity super cycle that has bestowed prosperity and paper wealth on the grain industry appears to be waning. There is a resurgence of positive economic outcomes emerging in the livestock and poultry sectors, as well as segments tied to the health of the U.S. economy such as horticulture and forestry. Drawing an analogy to baseball and tying it to agriculture economic cycles, the grain industry is in the seventh and eighth innings, while livestock and other enterprises appear to be in the early or middle innings of the cycle.
The drivers of change in agricultural economics are moderating. The emerging nations, i.e. the BRICS (Brazil, Russia, India, China, and South Africa) as well as the KIMT nations of South Korea, Indonesia, Mexico, and Turkey, are observing economic moderation of their GDP growth. The duration of the moderation depends on other factors discussed below.
Relaxed mandates on ethanol and biofuels sent a moderating signal to the agricultural marketplace. Ethanol is a major game changer in the economics of farming and ranching, similar to the Russian wheat deal in the 1970s. Competition from other sources of energy such as natural gas, wind, solar, coal and oil will continue to challenge the players in the ethanol industry.
Third, the Federal Reserve policy of low interest rates and low value of the dollar is in transition. These variables placed over $1 trillion in net income and paper wealth on U.S. farm and rural balance sheets and stimulated emerging nations’ economies. The continuing tapering in 2014 with a possible rise in interest rates could impact operating margins as well as appreciation in farmland values.
Finally, Mother Nature is still in control. Bountiful crops in many sectors have increased inventories. This, combined with slowing demand, has created conditions for economic moderation in some agricultural sectors. A close watch on growing and harvest conditions in the southern hemisphere and spring planting in the northern hemisphere will determine if the moderation of prices is a blip or a trend.
With an agricultural economy in transition, what are some priorities for producers and lenders?
- First, encourage producers to gather their financial records and meet with their lender in the first quarter of the year to review past outcomes and projections. A trend analysis of three years of financial ratios and key performance indicators is suggested. Then, benchmark the business to others using a peer analysis to discern strengths and areas for improvement.
- Producers, know the cost of production by enterprise and conduct scenario analysis to develop a game plan for operations, risk, and financial management. Mental toughness will be imperative, with a goal to be in the top one third of managers.
- There is not a “silver bullet” to success in management whether the industry is in the early or late innings. Success involves doing 100 little things one percent better, rather than doing one thing 100 percent better.
Dr. David Kohl will present, “Managing in the Great Super Cycle,” at the IBA Ag Bankers Conference on March 16-18 in Ames.