The economic forecast for agriculture is sunshine and storm clouds with a high likelihood for both, according to economist David Kohl.
The Virginia Tech professor and financial consultant joined a full slate of experts at the 2011 FCS Financial Commercial Farmer Symposium in Kansas City. Each made it clear that market volatility presents farmers with ample opportunities for both success and failure in a boom-and-bust environment.
An increasingly complex global economy sets the stage for both scenarios, Kohl said. “China and its growth significantly impact Midwest agriculture,” he observed, pointing out that the economic surge in emerging nations keeps grain prices high but also wields upward pressure on important farm inputs. Furthermore, with 40% of U.S. debt foreign-owned, changes in economic policy — particularly in China, where interest rates have recently been raised to curb inflation — can have a big impact on the interest rates farmers pay.
And then there’s oil. Economic growth in China and around the world is literally fueled by petroleum, and that expansion consumes a growing share of global production. Additionally, its price is hyper-sensitive to political unrest. About 70% of the world’s oil and about 60% of fertilizer are produced in militarily or politically sensitive regions, Kohl pointed out. That means 80% of farm expenses are linked to oil. “You have to put that in your game plan,” he said.
On the income side of the balance sheet, volatility will also deliver income opportunities, but producers must be in the position to take advantage of them, Kohl said. Farmers’ game plans should focus on developing cash flows and finance strategies based on multiple scenarios — particularly for potentially volatile fuel, fertilizer and land costs. Knowing breakeven points, he noted, will enable producers to build in profit margins in risk management and marketing programs.
Reliable credit will be increasingly important, and Kohl urged farmers to avoid what he called the low interest-rate trap. With global investors concerned about government debt and sharply focused on even slight changes in fiscal policy, interest rates can change quickly. That means farmers need to consider long-run and short-run sustainability, he suggested. “Seek a lender that is relationship-oriented,” he said. “Develop a relationship with credit sources that understand your business and your industry.”
Seize the opportunity
Proclaiming bullishness for crops and livestock, Iowa-based farm financial consultant Moe Russell said that low supply and sizzling demand driven by the growing affluence of Third-World consumers puts Missouri farmers in an enviable position.
“There is more money to be made in agriculture than in any other industry,” he declared.
Despite excellent prospects for agriculture, Russell cautioned that “everyone is downloading risk to the farmer.” Sound financial planning with a heavy dose of risk management is the edge that farmers need now more than ever. Profitability is a function of neither size nor type of operation, but a result of financial preparedness and creativity. “Bullet-proof your balance sheet and, in the bottom part of the cycle, you’ll catapult ahead,” he said.
Recommending working capital of 50% of annual revenue and overall equity above 60%, Russell advised farmers to keep fixed costs low and take a profit “whenever it presents itself.” Managing margins will be critical. He added that, among his clients, notable trends include partnering with input suppliers to lower costs, and hiring top-notch employees with specialized skills. “We used to consider people a cost. Now we consider them an asset.”
Mark Pearson, host of Iowa Public Television’s “Market to Market,” carried on the global theme, saying that the “most compelling story in business today” is the growth of the middle class in emerging nations, especially in China. Like Kohl and Russell, Pearson suggested that there are plenty of opportunities ahead for U.S. farmers. Grain producers, in particular, are “in the catbird’s seat,” he said, calling world demand for soy protein “unquenchable” and characterizing ethanol’s impact on the corn market as “here to stay.”
There is no better time to be in agriculture, Pearson concluded, “but we have to control and mitigate volatility because it’s something we’re all going to see for the rest of our careers.”
Parker writes from Parsons, Kan.
This article published in the March, 2011 edition of MISSOURI RURALIST.