June 12, 2024

Volatility in agriculture creates opportunities, challenges

BLOOMINGTON, Ill. — Volatility in the agricultural industry creates opportunities, not just challenges.

“A good manager positions himself to capitalize on that volatility,” said David Kohl, professor emeritus of agricultural and applied economics at Virginia Tech.

“I’m very optimistic about the opportunity for business and personal prosperity, but it’s not going to be about size, a specific enterprise or the next big thing,” said Kohl during the Illinois Land Values Conference presented by the Illinois Society of Professional Farm Managers and Rural Appraisers.

“It’s about being a five-percenter,” he said. “They’re a little bit better in a lot of areas like production, marketing, finance, risk management and human resources.”

Kohl encourages farmers to focus on things that are controllable.

“Our agricultural producers have to manage a triple play of prices, interest rates and sticky inflation,” he said. “Normally we only have to manage one.”

One of the biggest impacts on prices, Kohl said, is geopolitical agendas.

“About 10 years ago, globalization really started picking up acceleration,” he said. “China will trade with Brazil and Argentina if they have supply.”

Inflation is going to be sticky, particularly for agriculture, Kohl predicted.

“Eight out of $10 spent on farm business is somehow connected to oil,” he said. “About 60% of commercial fertilizer is produced in authoritarian regimes and the fertilizer will go to Brazil and Argentina before it comes to the U.S.”

Labor productivity also impacts inflation.

“We do not have a labor shortage — we have a work ethic shortage,” Kohl said. “When labor is not productive, that creates inflation.”

The past couple of years have been profitable for many farmers.

“For the 2024 to 2026 era, the costs will stay inflated and interest rates will stay up, but prices will come down,” the university professor said. “So, every ag producer should get as financially liquid as possible.”

One of the problems during the 1980s farm crisis, Kohl said, was that the regulators overreacted.

“They tightened credit too fast,” he said. “There are two ways to build financial liquidity, through profits or by refinancing and restructuring.”

It is a good idea to watch China’s economy since it is an important trading partner for the United States.

“China has its first population decline since 1961, so India is going to have a bigger population than China,” Kohl said. “China uses 10% to 15% of the oil and energy in the world.”

Therefore, if Chinese citizens start spending money, that will put pressure on oil prices and it will create export opportunities, the university professor said.

“We expected Europe to go into a major recession, but they didn’t because they had a mild winter,” he said. “That’s why weather is very important to watch and it’s dry in Europe now, so keep an eye on that.”

The rule of thumb for interest rates, Kohl said, is whatever the Fed rate is, add three and that’s the prime rate.

“I can’t explain the U.S. economy right now because I thought we’d be headed into a recession, but I’m observing people spending money like drunken sailors,” he said.

“Twenty-nine percent of all new credit cards are being issued to people with less than 620 credit score,” he noted.

“Eventually, they will have to take out a home equity loan and then they will run into tightening credit standards and this will ripple over to the ag arena and impact your operating money.”

Baby-boomer farmers are buying about 40% of the farmland, Kohl said.

“They don’t trust the stock market and they’re in the position to buy farmland at most any price,” he said.

“I’m also seeing farms moving into accelerated transition, but the parents try to treat the kids equal, which splinters the farm and then others buy the land,” he added. “And 20% of the land is being bought by athletes.”

Business IQ is important for all farmers.

“You need to know the cost of production, your breakeven and have written goals,” Kohl said. “I like working capital at 25% to expenses and 25% to 33% of the working capital as cash.”

Change occurs from the bottom up and not top down, the university professor said.

“The more we go high tech, the more we need high touch,” he said. “You got to have the people element behind you — that’s critical for success.”

“Net worth in financials and quality of life is equal to your network of people, so be careful of the network of people you associate with because they can pick you up or drive you down” he added.

“Success can be measured by dollar signs, but significance is what you give back to others in life.”

Martha Blum

Martha Blum

Field Editor