By Dr. David M. Kohl
Everyone is talking about the economy. The other day at Detroit Metro Airport, security guards were having a heated discussion about oil prices as I passed. I have noticed parents are visiting about the federal debt at graduations and wedding receptions. Recently at a YMCA in the Midwest during my early morning workout, I overheard a conversation focused on the future of agricultural subsidies and farmland prices by a bunch of elderly people. Yes, the global, national, and ag economy are top of mind. Let us examine the current and future status of the dismal science and draw some implications to your business strategy.
In the agricultural economy, particularly the grain and row crop sectors are in the midst of an eight-year super cycle. For historical reference, over the past 100 years, there have been four super cycles created by market demand, weather, and supply and demand imbalances. The typical super cycle lasts two to three years. This unusually long bull market has been driven by five significant game changers.
First, it has been driven by the growth of emerging markets, specifically the BRICS nations. Growth of these countries, including Brazil, Russia, India, China, and, now, South Africa, has been spurred by the United States and world economic stimulus since the financial crisis in 2008. These countries comprise approximately 20 percent of the world economy, but just under 50 percent of the world economic growth during the last decade. The winding down of the stimulus programs both in the U.S. and abroad, along with a tightening of government economic policy in China and some of the other emerging nations may foretell a slowdown of the economic bull market for export commodities in agriculture.
[rich-callout title="Rates Remain Stable" image_id="2014"] The 30-day vs. 15-Year Farm Credit Bond chart below illustrates that 30-day issues have remained at historically low levels for the last two years and 15-year issues continue to stabilize. The gap between short-term rates and long-term fixed rates remains wide and actually grew slightly over the last six months.[/rich-callout] Of course, ethanol production has been a major driver of grain markets and the economic bottom line throughout the agricultural sector. One must be mindful of the status of the subsidization of this industry which is housed in the Energy Department of the U.S. government. Any changes in policy due to budget shortfalls can have a large impact on agriculture, both on the grain and livestock side.
Factors such as the weak dollar and historically low interest rates, along with weather issues in major production centers in the U.S. and abroad can impact supply and demand balances and continue to support a bullish, but very volatile, market for agriculture.
These game changers have been capitalized into land values and cash rents particularly in the Midwest and upper Midwest. Will the land value rush continue? Appreciated land values and cash rents are presently creating a false sense of security in many producers’ financial statements. Quite a few producers are cash purchasers of land and long term contracts on farm rent with little borrowed capital, which is indicative that this is not a credit bubble like the 1980s or the recent financial crisis that hit commercial and residential real estate. However, one could contend that this is an asset bubble, driven by the aforementioned domestic and global economic fundamental game changers. For producers who are in a growth mode, prudent debt, cash, and liquidity management strategies are imperative in agricultural marketplace that appears to be at the top of the cycle.
Concerning the general and global economic outlook, moderation of growth with extreme volatility created by economic “black swans” or unusual events will be ever- present on the economic radar screen into the future. Managing for opportunity created by these events will be a top priority for agricultural producers. This will require prudent business strategies such as knowing the cost of production by enterprise and testing “but what if” scenarios in revenue and cost.
A sound economic risk management program that is executed on the revenue side, the cost side, and the interest rate side of the business will not be an option, but it will be a requirement in a global economic environment with a surprise around every corner. The economy has everybody talking about a lot of things, but few are doing anything about it. Successful producers use the HUT Principle: hear, understand, and take action!
Everyone is talking about the economy. The other day at Detroit Metro Airport, security guards were having a heated discussion about oil prices as I passed. I have noticed parents are visiting about the federal debt at graduations and wedding receptions. Recently at a YMCA in the Midwest during my early morning workout, I overheard a conversation focused on the future of agricultural subsidies and farmland prices by a bunch of elderly people. Yes, the global, national, and ag economy are top of mind. Let us examine the current and future status of the dismal science and draw some implications to your business strategy.
In the agricultural economy, particularly the grain and row crop sectors are in the midst of an eight-year super cycle. For historical reference, over the past 100 years, there have been four super cycles created by market demand, weather, and supply and demand imbalances. The typical super cycle lasts two to three years. This unusually long bull market has been driven by five significant game changers.
First, it has been driven by the growth of emerging markets, specifically the BRICS nations. Growth of these countries, including Brazil, Russia, India, China, and, now, South Africa, has been spurred by the United States and world economic stimulus since the financial crisis in 2008. These countries comprise approximately 20 percent of the world economy, but just under 50 percent of the world economic growth during the last decade. The winding down of the stimulus programs both in the U.S. and abroad, along with a tightening of government economic policy in China and some of the other emerging nations may foretell a slowdown of the economic bull market for export commodities in agriculture.
[rich-callout title="Rates Remain Stable" image_id="2014"] The 30-day vs. 15-Year Farm Credit Bond chart below illustrates that 30-day issues have remained at historically low levels for the last two years and 15-year issues continue to stabilize. The gap between short-term rates and long-term fixed rates remains wide and actually grew slightly over the last six months.[/rich-callout] Of course, ethanol production has been a major driver of grain markets and the economic bottom line throughout the agricultural sector. One must be mindful of the status of the subsidization of this industry which is housed in the Energy Department of the U.S. government. Any changes in policy due to budget shortfalls can have a large impact on agriculture, both on the grain and livestock side.
Factors such as the weak dollar and historically low interest rates, along with weather issues in major production centers in the U.S. and abroad can impact supply and demand balances and continue to support a bullish, but very volatile, market for agriculture.
These game changers have been capitalized into land values and cash rents particularly in the Midwest and upper Midwest. Will the land value rush continue? Appreciated land values and cash rents are presently creating a false sense of security in many producers’ financial statements. Quite a few producers are cash purchasers of land and long term contracts on farm rent with little borrowed capital, which is indicative that this is not a credit bubble like the 1980s or the recent financial crisis that hit commercial and residential real estate. However, one could contend that this is an asset bubble, driven by the aforementioned domestic and global economic fundamental game changers. For producers who are in a growth mode, prudent debt, cash, and liquidity management strategies are imperative in agricultural marketplace that appears to be at the top of the cycle.
Concerning the general and global economic outlook, moderation of growth with extreme volatility created by economic “black swans” or unusual events will be ever- present on the economic radar screen into the future. Managing for opportunity created by these events will be a top priority for agricultural producers. This will require prudent business strategies such as knowing the cost of production by enterprise and testing “but what if” scenarios in revenue and cost.
A sound economic risk management program that is executed on the revenue side, the cost side, and the interest rate side of the business will not be an option, but it will be a requirement in a global economic environment with a surprise around every corner. The economy has everybody talking about a lot of things, but few are doing anything about it. Successful producers use the HUT Principle: hear, understand, and take action!
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