2007 is going down as a year of heavy turbulence from an economics perspective. Alan Greenspan’s book, The Age of Turbulence, develops a good subplot to the agriculture industry’s short- and long-term future. The following are some of the interesting views from the road that encompassed my 230,000 air miles and 70,000 Hertz rental car miles on the back-roads of agriculture this year.
- Land values in northwest Iowa that were $3,000/acre are now trading north of $8,000/acre. Coffee shop talk throughout the upper Midwest is that land values will rise to $10,000/acre by 2010. The low value of the dollar is encouraging export markets and modest interest rates, and strong profits from high commodity prices are being capitalized into land values. A change in any one of these variables will dampen expectations on the paper value of land.
- Double jeopardy is the game being played with most agricultural commodities. With both fixed and variable input costs nearly doubling over the past three years, bottom-line margins are becoming more like the preboom era. A business that does not have a strong risk management program had better be prepared for severe economic shock concerning losses.
- Widening of the gap of financial performance is becoming the new norm. According to FinPak, the high 20% of producers generated a 14% rate of return on assets (ROA), while the low 20% generated negative 2.7 ROA. How did the successful ones do it? Earns and turns, or margin management and asset utilization. Some farmers and ranchers know how to strategize and execute, while others just don’t get it. Asset appreciation in land has kept these producers afloat, but is the economic iceberg ready to sink the business titanic?
- People issues are becoming a major force facing most of agriculture. This ranges from employees, family and business transition to interaction with the public and consumers. Knowing how to work with and through people will be one of the most important attributes of management success. In the end, it will also create the most potential turbulence for the industry.
Trends for 2008 and Beyond
The agrilending industry will tighten credit standards proactively to avoid the similar challenges in the housing markets. This could be a positive action because usually the worst financial mistakes are made in the best of times.
Stagflation could raise its ugly head. Stagflation is a stagnant economy with inflation, similar to the late 1970s. The Federal Reserve can do little to avoid this, and a restructuring of the economy will be required to work through challenges over a two to five year period.
Could an asset bubble burst be on the horizon in emerging countries such as China, India and other parts of the world? A global slowdown could expose risky lending practices that have poor documentation and false information, particularly in housing and commercial real estate in these red-hot emerging markets, which could create severe turbulence.
Of all the potential presidential candidates, consensus in my travels is that none of the above would win the presidential elections in November. People feel that the political process is too long, with too much media coverage and too many sideshows. Big money has too much of an influence. Only time will tell who will rise to the top!
- Get your credit score and credit report updated.
- Get your balance sheet strong, particularly in working capital.
- Get two to six hours of education per week.
- Get in the position to positively discuss our ag industry to the non-farm public.
- Get your advisory team and peer network in place, and use them.
Happy Holidays! See you in January for the LSU and Ohio State game. Expect a surprise upset!
Dr. Dave Kohl, Alicia Morris, and Angela Meadows
Editor’s note: Dave Kohl, The Corn And Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at firstname.lastname@example.org.