Wow. 2006 has been an interesting year in agriculture and the economy. What lies around the corner in 2007? Our final column for 2006 and first one for 2007 will examine some of the key issues and challenges and, yes, we will attempt to make some predictions.
Who could have imagined ethanol and alternative fuels would have such an impact on the corn and grain markets in general? Expect to see volatility in energy, which is very dependent upon the weather, terrorist events and the health of the U.S. and Chinese economies. Will ethanol, biodiesel and alternative fuels be the 2010 gold rush? Will they be sustainable? A key piece of advice is that the energy market is bigger than the U.S. on both the supply and demand sides. Like any business model, profits are large for early entrants and how long the cycle lasts will be dependent upon competition, technology and the ability to adapt.
Land values are continuing to strengthen the balance sheets of producers. According to a Kansas State University study, 37% of agricultural land value is attributable to sources outside of capitalized agricultural returns and government supports. Will the U.S. and Canada become similar to Europe due to investment demand from non-farm and international investors? With low interest rates and a strong economy this trend could continue.
Food and Fiber
Expect food to be increasingly scrutinized by the media and public in 2007. As baby boomers age and there is a higher propensity for diseases such as cancer and heart disease, many will attempt to link conditions back to food and fiber rather than genetics. Slow food, organic and natural foods and local agricultural products will gain in popularity but will not escape the wrath of the public and media.
Grain and Livestock
2007 will be a time to harvest your wins on the grain side, i.e. sell for a profit for those who pull the trigger. The new year will be a time of adjustments in land rents and prices, which will increase cost of production, making U.S. agriculture less globally competitive. Success in livestock enterprises will be a result of strategies implemented over the last couple of good years and your risk mitigation program.
Agriculture will continue to consolidate through mergers and acquisitions at the producer and agribusiness levels. Collaboration and alliances with other owners, control rather than ownership of assets and agriculture that is not geographically bound will be emerging trends amongst larger producers.
Hiring and retaining good people as well as business transition management will be major challenges to agriculture and the general economy. Keep in mind your best draft choice sometimes lays outside the family
There is a 40% chance of recession in 2007, which is double the probability of last year at this time. The adjustment in the housing market and the Fed Funds rate along with value of the dollar on international markets will be three components to observe when gauging the health of the economy. By the way, my truckers, train traffic and taxi cab drivers are feeling a slow down.
Here is some advice for going forward in 2007 from my producer who is an avid Cubs fan:
· Don’t chase the market.
· Have a slow, steady expansion plan
· Maximize current efficiency and production
· Reduce debt
· Be in the position to benefit from others’ blunders four to five years from now.
Remember the big hitters of the 1970s were caught by the economic curve ball of the 1980s. The successful producers of today capitalized on the bargains of the 1980s. Life is all about strategy and timing.
Happy Holidays and best wishes for a prosperous New Year.
Dave Kohl & Alicia Morris