2011 was an interesting year in many ways. After 200,000 miles of air travel, 75+ Hertz rental car trips and traveling in 39 states and five Canadian provinces interacting with many leading international groups, sometimes the complexity of the world is difficult to grasp. Two words size up the agricultural and business world: interconnectedness and convergence.
In the early part of 2011, it appeared that the U.S. economy was making a nice recovery. However, black swans or unusual events and the convergence of increased oil prices, Japan's natural disaster and sovereign debt issues placed a damper on the consumer, and, therefore, businesses that provide consumer services.
Swiss cheese has become a good metaphor to describe the agricultural and U.S. economies. Some areas are in the islands of prosperity, while others are experiencing a recessionary feeling. Those in agriculture and the general economy who are interconnected with the emerging BRICS nations’ demands are experiencing both profits and increase of asset values and paper wealth on the balance sheet. It logically follows that others who have economic linkages to the domestic economy and areas of the world in slow or negative growth modes are in a negative or slow growth part of the business cycle.
The grain industry, while experiencing high prices, has more at stake with higher variable input costs, and rapidly increasing fixed costs in terms of cash rents, land values and overhead cost for machinery and equipment investments. This is leading to margin compression for some businesses.
Turning to the dairy industry, there has been a rise in prices due to exports of whey and dry milk powder. These high milk prices have been offset by high grain and other input costs. The hog and poultry industries have experienced similar trends. Extreme droughts in the southern plains and other areas have reduced cow and livestock numbers, which has resulted in higher prices for both cows and calves.
“Land values gone wild” describes some of the agricultural and rural regions today. Paying $20,000/acre for farmland was unheard of in the Midwest three to five years ago. Mineral, water and oil rights are boosting paper values in many regions, creating mini boomtowns with the feeling of the old gold rush days. Where it stops is only a guess, but one might concur that the cycle is in its late stages. Only one major shock or convergence of events in the domestic or global economy could start a correction.
Attendance at this year’s producer, agribusiness and lender events has been strong as excitement and optimism permeate the groups. Young people, women and minorities have had an increased presence, attempting to gain understanding of the complex global economic situation. This adds a newfound energy to groups along with the cautionary older generations of people who are concerned with a return of the 1980s, or worse yet, the 1930s.
When it is all said and done, it has been a strong kickoff year to the second decade of the 21st century for those producing food, fiber and fuel. Disciplined business growth with a keen eye on financial and overall risk management programs will continue to be a key driver of successful business models in a very volatile world. Agriculture is still an industry grounded in the principle of balance, exposed to the uncertainties of Mother Nature, where having the right people on your team can lead you to good places.
Our team wishes you well in 2012. Stay healthy in mind, body and spirit. I hope to see many of you in my travels next year. Be sure to take some time off to celebrate and enjoy the season!
Editor’s note: Dave Kohl, Corn & 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 [email protected]