The Ag Globe TrotterDr. Dave M. Kohl
Welcome to the weekly edition of The Ag Globe Trotter by Dr. Dave Kohl.
It is hard to believe another year is almost in the books as we are approaching the second anniversary of the pandemic. This has been a year of transition for presentations. Since the start of the pandemic, my team has conducted nearly 250 online presentations to a wide range of audiences all over the globe. Face-to-face events have been interspersed occasionally and the engagement, while sometimes constricted, was refreshing.
It was enjoyable going through the new Salt Lake City airport. However, I miss all of the front-line people, such as the shoe shiners, the Sky Club personnel, pilots and flight attendants that have retired. Who would have imagined growing up in the 1950s and 1960s watching Sandy Koufax, Bob Gibson and the “M&M boys” (Mantle and Maris) that I would be looking out of a window on a Delta jetliner over the World Series stadium and also watching the game simultaneously on my own personalized screen on the airplane? A highlight of the year has been touching base with my former coaches and students and dropping notes of their personal successes and receiving thanks in return.
Moving to agriculture
The year 2021 was one of economic transition. Inflation, which had been dormant for several decades, is now a major threat to profitability in the agriculture sector. Financial stimulus, accommodative monetary policy, supply chain disruptions, labor issues and geopolitical shifts have all contributed to higher inflation rates. As a well-respected agricultural lender commented, “When economic change occurs, it happens quickly.” The current environment is certainly evidence of that.
A new term circulating the globe is greenflation, which is inflation as a result of environmental initiatives. This will continue to challenge the mindset of many agriculture producers. Will more government payments be issued as a result of green strategies and how will you as farmers and ranchers position your business to capitalize on these changes?
As we end the year, agricultural profits and loan portfolios are strong. However, when the layers of profits are peeled back, one can quickly find a false sense of security because government payments were an important variable of success. When one analyzes the national farm financial database, FINBIN, which includes 3,500 farms over 22 states, over 60% of crop farmers’ net income was the result of government payments. For dairy, hog, and beef farms government payments were 72%, 127%, and 108% of net income, respectively. When one reflects on these government payments, they often come with no or minimum cost of production, which distorts breakeven points.
Land values have exploded in recent months in many areas, particularly the Midwestern part of the country. Ten to 30% increases have been registered as government payments and high profit margins have been capitalized into land values. Individuals outside of agriculture are also investing in land because environmental initiatives are seen as an opportunity. With these high land values, can the U.S. remain competitive to other regions of the world? With the mandates in Europe for 40% less fertilizer and 50% less pesticide usage by 2030, will this region of the world continue to be productive and export agricultural goods? If not, this might be a strategic advantage for U.S. agriculture producers.
The power of technology is amazing. This is demonstrated by drought-resistant seed technology. Very little rainfall a number of decades ago would have resulted in a crop failure, but now there is a yield. Whether it is gathered by robotic milkers or input yield applications, the power of data is growing exponentially, creating a new paradigm in agriculture.
Consumer trends are accelerating at an exponential pace in the U.S. and abroad. The challenge of nontraditional agriculture producers, like plant-based or lab-based production, is gaining momentum. These products are one of the fastest-growing trends among young Chinese consumers.
Two years ago, who could have imagined that cryptocurrency would show up on farm balance sheets? Questions concerning how to value cryptocurrency are now being discussed in agricultural lending seminars and with individual customers.
When it is all said and done, the owners and managers that utilize a high level of business and financial IQ will still encounter challenges, but they also will create opportunities. On one hand, you must be innovative and adaptive, but also follow a process and focus while tweaking your business model as the economic landscape shifts.
We are closing down another year and my team and I would like to wish you well over the holiday season!
Dr. Kohl is Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship in the Department of Agricultural and Applied Economics at Virginia Polytechnic Institute and State University. Dr. Kohl has traveled over 8 million miles throughout his professional career and has conducted more than 6,000 workshops and seminars for agricultural groups such as bankers, Farm Credit, FSA and regulators, as well as producer and agribusiness groups. He has published four books and over 1,300 articles on financial and business-related topics in journals, extension and other popular publications.
© Northwest Farm Credit Services 2021