Farmers should expect volatility to continue
By Holly Martin
Extreme volatility has been the name of the game for American agriculture producers in the last year. And that trend is going to continue, said Dr. David M. Kohl, professor emeritus, agricultural and applied economics at Virginia Tech.
"If you think all of this volatility is old hat, that's the new normal," Kohl said. But with unpredictability, there is tremendous opportunity, particularly in the field of agriculture. Kohl spoke during the Ag Issues Forum recently sponsored by Bayer CropScience.
Kohl said the world is coming into a time period of economic moderation, across all segments, not just agriculture. You are going to see volatility, he said, but it will be volatility at the extremes, followed by periods of extreme calm. It is those extremely calm periods that will entice people into thinking the volatility is over. Consequently, consumers are going to have to be careful. They will need to re-prioritize business and personal decisions. "And we will all be better for it."
Kohl said it is a paradigm shift, away from living off of balance sheets and credit to liquidity and cash.
There will be five key elements to business in the next few years, Kohl said.
Cash will be extremely important, he said. "People say cash doesn't work for you, but if you are in a deflationary economy, you are getting a return on your investment because cash buys more of a cheaper investment."
Liquidity will also be key, which can sometimes be a real issue for agriculture producers, Kohl said. Farmers need to build liquidity and working capital. "If you have a hiccup, the liquidity allows you to get through the downturn. However, on the uptick, it helps you capitalize on business opportunities as they come along."
Businesses will also have to be creative. "We are in a period of time where you are going to be extremely innovative," Kohl said. He suggested business owners, including agriculture producers, examine their business and name their top three innovative practices. Doing so will keep owners aware of what keeps them above the rest.
Being resourceful is extremely important, with not only their natural resources, but finances, risk management and employees, Kohl said. At this critical financial time, poor employee management can drain a business. Owners have to hire the best employees. "You don't want dead wood around you," he said.
Business owners have to be very selective in this type of environment, Kohl said. "There is tremendous opportunity in this type of environment, but you are going to have to be selective." You have to ask yourself: Is this opportunity congruent with your financial goals, with your management and operating systems and your resources?
In agriculture, the industry is the "tale of two economies" with crops and livestock, Kohl said. Because livestock producers have been losing money over the last few years, they have had to tighten their belts. "You've had to count your dollars and cents. You have had to make calculated business decisions," Kohl said.
Crop producers have had some very profitable years, recently. Because of that, he sees more danger in the crop segment than in the livestock markets.
Kohl said he hears a lot of people talk about the "two in ten year rule." Two out of ten years the market and weather lines up and farmers make money. The other eight years, they get by. "But good managers eek out a profit in those other eight years, as well. Since 1998, an increase in land values has carried the others."
That can be dangerous. "We have to be careful because in agriculture we have a lot of millionaires on paper that haven't ever earned a dollar,' he said.
Kohl warned agriculture producers who believe "we are in a new normal" regarding commodity prices. "If you hear people say that, you better cover your behind." Agriculture is coming off of a super cycle, Kohl said. From 2003 to 2008, prices increased 131 percent from the trough to the peak that five-year period.
Now, the U.S. economy is impacting the world. "The United States, Mexico and Canada are 5 percent of the world's population, but 29 percent of the world's economy. If you don't think we are important on the world sector, the (United States) produces more in one day than 25 percent of the countries in the world produce in a whole year." What happens in the U.S. economy is important to the world economy, Kohl said.
Spreading the wealth sounds like a good idea, but it doesn't work, Kohl said. "I can take all the wealth in the world today and divide it among us equally in this room and, in five years, 20 percent will have 80 percent of the wealth. That's the financial laws of the jungle."
Any agriculture producer surviving in the next decade is going to have to think globally and act globally," Kohl said. Issues, whether they be agriculture-related or not, have impact on markets and producers cannot escape it.
There are reasons to be optimistic about American agriculture, Kohl said. He pointed to technological advancements, like drought tolerant traits, that will make a huge impact for producers in the coming years.
In the future, Kohl sees part of U.S. agriculture looking similar to Europe's, with an increase in the locally-grown, organic sector. He expects that portion of U.S. agriculture to grow from 8 percent to about 20 percent. But the other part of the industry will be large farm family units that will utilize the advancements in technology and capitalize on opportunities to increase their production.
"These people really get it," he said. "It is going to be exciting."
Holly Martin can be reached by phone at 1-800-452-7171 ext. 1806 or e-mail at email@example.com.