|Dr. David Kohl described today’s agricultural situation as “an economic reset” as opposed to a crash.|
Virginia Tech’s Dr. David Kohl encourages farmers to plan for change.
The ability of farmers and ranchers to survive and thrive in today’s economy depends on their willingness and success in changing their game plans to take advantage of quickly changing environments. In short, those in agriculture must be able to exploit the volatility that now prevails.
That’s the advice from Dr. David Kohl, professor emeritus of Agricultural Economics at Virginia Tech University, whose rapid-fire, no-nonsense presentations have made him a popular speaker at producer meetings from coast to coast. Kohl recently addressed some 300 farm operators and others from the agricultural industry attending the 10th anniversary Farm Futures Summit held in St. Louis.
Described by Farm Futures organizers as one of the conference’s founders and a true "agricultural road warrior" due to his frequent appearances at industry meetings, Kohl said the commodity super cycle that brought record profits and asset appreciations to many is now in the rear-view mirror.
Predicting the 2007-12 period of general prosperity for agriculture will be viewed in the future as "an aberration" caused when a number of favorable conditions came together, Kohl also described today’s situation as "an economic reset" as opposed to a crash. The factors that created the good times have shifted, however, and now are akin to headwinds. Among other things:
Economies of the "BRICS" nations of Brazil, Russia, India, China and South Africa, along with the KIMT nations of South Korea, Indonesia, Mexico and Turkey, were growing at rates of 8-10 percent annually, but their composite growth rate now is under 4 percent. Growth in those areas is critical to U.S. agriculture and rural America, Kohl said.
Mandates for ethanol usage are softening and oil prices have dropped as well. Both situations need to be watched carefully because commodity prices tend to follow those for oil and the level of ethanol production has a major impact on demand and prices for corn and grains generally.
Decisions by the U.S. Federal Reserve and central banks in Europe, China and Japan continue to play a major role. And while this nation appears to be easing its stimulus, other nations continue "putting the pedal to the metal." That combination strengthens the dollar and makes U.S. farm exports less competitive. However, "It’s not about the strength of the dollar. It’s the duration of the dollar’s strength that matters," Kohl asserted.
The wild card is the weather. "Mother Nature still is in control," the economist said, and climatic conditions in both the northern and southern hemispheres will affect how long the economic reset continues.
The agricultural good times created an asset bubble because ag assets were seen as one of the best options for investment, Kohl observed. Now, the decline in land values "is burning into the muscle" of the farm economy’s strength, making working capital even more important in today’s volatile economy.
Kohl summarized what he viewed as troublesome results from a survey of 800 producers. In that study, 66 percent said they did not have a written business plan, a situation Kohl believes is the result of complacency.
Whether producers can position for the economic reset requires that they be able to respond "yes" to a number of key historical questions about their operation.
Has profitability exceeded the rate of inflation and interest rates?
Has balance sheet growth been earned versus appreciated net worth?
Has working capital been built and protected during the positive economic cycle?
Has it been possible to cut living expenses if needed?
Is it able to shed unprofitable land, machinery, livestock and human assets when necessary?
Has it developed and followed a marketing risk management program?
Does it have the ability to cut 10-30 percent of its costs?
Is working capital adequate to cover losses of 2.5 years or more?
Does it have a ratio of less than 5:1 for term debt to earnings before interest, taxes, depreciation and amortization?
The greater the number of "yes" answers, the greater an operation’s chance for long-term survival. If fewer than half the responses are positive, there’s cause for alarm.
Kohl frequently uses a dry sense of humor and clever turns of phrase to reinforce his points. His presentation at the Farm Futures Summit was no exception. Here’s a sampling:
"Good times don’t last forever; neither do the bad times."
"Worst mistakes occur in the best times."
"The best opportunities come along in challenging times."
"The deeper the hole you dig, the more opportunity to bury yourself alive."
"It’s difficult to take a cat drinking cream and switch to skim milk."
"The best crop you will ever raise will be your children, grandchildren and other young people."