Aug 10, 2017

Economic Challenges Can Become Opportunities

When it comes to farming, what you plan is as important as what you plant, ag economics experts say.

David Kohl, an author and nationally known speaker on the economics of farming and agribusiness, and Lynn Paulson, Bell Bank’s director of agribusiness development, recently shared their thoughts on the depressed ag economy at an agricultural symposium Bell sponsored in Moorhead and Fergus Falls, Minn., and Sioux Falls, S.D.

“Don’t get too financially leveraged,” Kohl says. “Keep good degrees of working capital, and have plans A, B, C and D.”

Top producers plan, strategize, execute and monitor, Kohl remarks. They stay on top of their balance sheets and understand that equity does not service debt.

“Get efficient before you get bigger,” he warns, advising producers to live modestly, maintain working capital and monitor cash-flow projections every month.

Kohl, who has conducted more than 6,000 workshops and seminars, and is a professor emeritus in the Virginia Tech agricultural and applied economics department, also told participants what to expect in both domestic and global economics.

“Manage the things you can manage, and manage around the uncontrollable,” he suggests. “Everybody gets caught up in the big picture – what’s going on in China, what’s going on in the White House. We can’t control that. We have to manage around it.”

The super cycle of 2006-2012 was an aberration, says Kohl, who has years of experience working with lenders, agribusinesses and institutional leaders. Kohl added that he doesn’t expect another super cycle to happen anytime soon.

Going forward, farmers should keep an eye on:

  • Oil prices: “$8 out of every $10 you spend on your farm or ranch is related to oil.”
  • Weather and water: “Water management is going to be critical. Good producers understand how weather is impacting their fields.”
  • Interest rates: “We will see gradual interest rate increases. The rise will feel like the 1980s, because the percentage is phenomenal, and we’ve been so low for so long.”
  • European elections: “Worldwide, we’re going between populism and globalism. Globalism tends to benefit agriculture, populism tends not to.”
  • North American Free Trade Agreement: “The threat of tearing up NAFTA is sending people looking for other sources,” Kohl says. “You better start building your balance sheets and your business models to be able to handle an international trade shock. Agriculture is the point dog of international trade relations. Politically and militarily, agriculture is often the one that feels it first.”
Paulson, who has worked in ag lending for more than 30 years and farms 1,000 acres in Benson County, N.D., told producers farm debt is five times higher than net income, and it’s the highest it’s been since 1985. But he says this environment is also revealing who the top managers are.

“Good managers are not doing one big thing better; they’re doing a lot of things 5 percent better,” he notes. “It’s not necessarily how you handle adversity, but how you handle prosperity.”

The main difference between top-profit farms and low-profit farms is top-profit farms have a lot of working capital, and they use it judiciously, Lynn says.

“The top 20 percent of producers know their cost of production, they have realistic revenue targets, and they keep in touch with their lenders,” he notes.

Bankers are much more prepared for this downturn than they were in the 1980s when both producers and bankers were caught unprepared, Lynn says. Bankers are also more willing to walk away from a deal.

“Most businesses don’t fail because they go broke, they go out of business because they run out of cash,” he comments. “You can only refinance debt so many times.”

But there are reasons to be optimistic:

  • There is long-term world demand for agricultural products.
  • The rise of the middle class across the globe means demand for high-quality ag products will increase.
  • No country can produce more ag product at a higher quality more efficiently than the U.S.
  • Low prices generally cure low prices.
  • Good management skills are being learned and honed in this environment.
This is the third ag symposium with Kohl and Paulson Bell has sponsored.