By Dr. David Kohl
The economic realities of the agriculture industry would suggest that most commodities and enterprises are experiencing a good old-fashioned down cycle. On the other hand, producers in the beef sector and some other enterprises are wondering how long favorable times can last. When conducting educational events, many individuals are asking about the depth and the duration of this down cycle. Many producers remember the down cycle that occurred post commodity super cycle from 2013 to 2020. However, this time costs are inflated and interest rates are nearly double. Some businesses are experiencing mounting losses and machinery and equipment values are starting to decline. For the most part, land values appear to be resilient. The economic stress is also contributing to a reduction in working capital.
Duration
The duration of this cycle has one wildcard and that is the weather, both here in the Northern Hemisphere and in the Southern Hemisphere. Extreme weather, such as periods of extended dryness followed by intense moisture in a short period of time, seems to be the “new normal.” These occurrences in major production belts around the globe shift supply and demand and cause imbalances in a New York minute. A well-planned marketing and risk management program that is executed and monitored will be imperative for the profit equation over the next few years. If this is not your management strength or passion, a good advisor that has your strategic goals in mind could be the answer.
In the longer term, export markets and a global analysis need close scrutiny both on the price and the input side of the bottom line. It appears that the United States’ largest export partners, Mexico, Canada, and China, each have issues. China and Canada both have aging demographics and there is social unrest in Mexico. The buildup of both personal and government debt in many of these countries along with asset value corrections in the Chinese real estate and stock markets have slowed consumption. Tariffs, sanctions, and uncertainty in trade negotiations would suggest sluggish markets at best. Recently, stimulus programs in China have not moved consumers to increase purchases. On the expense side, the production and distribution of fertilizer and other key inputs that are impacted by the ongoing military and geopolitical challenges require a business model with stretch in the “profit waistband.” A monthly or quarterly cash flow that is monitored based on the cost of production and break even points will be critical. Economic and financial volatility is best managed with a plan to build and preserve working capital backup reserves, which are generated either through profits or debt refinancing.
Competition from the Global South
Decoupling from the globalization that started after World War II appears to be accelerating and will impact U.S. agriculture. The rise of agriculture competitors from the Global South is in full force. One factor behind this has been China’s Belt and Road Initiative patterned after the United States’ Marshall Plan which reconstructed Europe and Asia after World War II. Since 2013, China has been very strategic and has invested over $1.3 trillion in approximately 70 countries globally, but is focused primarily on the Southern Hemisphere. The goal was to have access to another source of food, fiber, and fuel other than Western nations for the growing population in the Asian region. Furthermore, in 2018 a framework for a currency other than the U.S. dollar was developed and is gaining momentum amongst the BRICS nations (Brazil, Russia, India, China, and South Africa). More direct trade is now occurring amongst these nations, circumventing the sanctions and tariffs as a result of using the U.S. dollar as an economic weapon. Will these nations work together for a common goal? If so, an economic downturn could become a paradigm shift in competition for producers in the Western nations.
U.S. Economy
The U.S. economy could be coined as one that is very fragile to any adverse events. In recent years, the consumer has been driving the economy. The stimulus checks from the COVID-19 pandemic encouraged consumer spending. In recent years, high inflation has led to a buildup of credit card and consumer debt. Consumer spending is also affected by the paper wealth gains in the stock and real estate markets.
The buildup of federal debt, now currently at $35.7 trillion dollars with record deficits of nearly $2 trillion dollars, is not sustainable in the long run. So far, tough medicine such as budget cuts and increased taxes have not been a political option. The interest expense to finance these debts is now a larger budget item than the military and is close to surpassing the Social Security and Medicare budgets. This winter, watch for the economic health of a cast of three economic characters in the U.S. economy.
- ALICE: Asset Limited, Income Constrained, Employed
This segment of consumers has spent their stimulus funds and are now incurring large amounts of credit card and consumer debt. In some cases, this group is experiencing increasing delinquencies, but it is not enough to put the U.S. into a recession. - HENRY: High Earner, Not Rich Yet
These individuals are high income earners, but they are constrained by housing costs. As a result, housing costs are a burden on consumption. This group also has not enjoyed the run-up in asset appreciation in the stock and real estate markets. If this segment loses jobs through artificial intelligence (AI) or corporate layoffs, this could place the economy into a recession in 2025. - HERMAN: High Earner, Rich, Mobile, Appreciated Net worth
These individuals are high earners, rich, mobile, and have appreciated net worth often between $1 and $10 million dollars. This group has had time to accumulate paper wealth in the stock and real estate markets. Job losses or a correction in either the stock market or the housing market could impair this group’s spending patterns and place the U.S. into a deep recession.
The Positives
As a veteran of many economic cycles and as an educator and business owner, there is a silver lining. The best business models are established and built during down cycles. Focus on the controllable variables and strive to maintain well organized financial records. Utilizing a team of advisors can be very helpful to make objective decisions. Strategies to manage and navigate around the uncontrollable variables, such as using a marketing and risk management program, and being aware of trends will be high priorities at the quarter-century mark.
Dr. David Kohl energizes agricultural lenders, producers, and business professionals with his keen insight into the agricultural industry through extensive travel, research, and networking around the globe. He is a Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship at Virginia Tech, Blacksburg, VA. Dr. Kohl has traveled over 10 million miles in his career and conducted over 7,000 workshops and seminars for a variety of agricultural audiences. Additionally, Dr. Kohl’s personal involvement with agriculture provides a unique perspective into the future trends of the agricultural industry and economy.
