With the COVID-19 pandemic still raging, lots of volatility in the corn and soybean markets, and surplus dairy production threatening milk prices, ag economist David Kohl says good farm management is more important than ever.
And while the pandemic has created hardships, it’s a great time to take advantage of opportunities, and separate the things you can control from the things you can’t control.
“You’re going to have to be flexible, innovative and adaptive, but you’ll also have to focus,” Kohl said during his keynote address at the virtual Pennsylvania Dairy Summit.
There have only been a handful of great commodity super cycles, Kohl says, and we’re in the middle of one right now, which he calls the “government and central bank super cycle.”
The government stimulus checks, devaluation of the dollar, the effects of climate change in certain areas and low interest rates are bringing investors back into commodities, he says. Not to mention, China is still recovering from African swine fever and is rebuilding its hog herd.
But unlike the super cycle of the early 2010s when corn and soybean prices hit the stratosphere for a couple of years, Kohl doesn’t see this super cycle lasting very long. Government stimulus will eventually end, and commodity demand, especially from China, likely will cool down.
“One thing, it’s false, but it’s impacting grain,” he says. “I see this abating in 2021-22, but a strategy is needed post cycle.”
Things to watch for
Globalization has been good for dairy as export markets have grown significantly over the years. But Kohl thinks that growing nationalism could threaten future dairy export markets.
Couple that with the fact that COVID-19 highlighted this country’s problems with supply and marketing chains, and the fact that the pandemic likely will continue to affect traditional marketing chains, and this could be a drag on dairy supply and demand. Go back to last April when milk had to be dumped because the industry couldn’t pivot quickly enough to react to sudden changes in consumer behavior.
Other nations also are starting to become more self-reliant, Kohl says, so watch this closely as it could affect trade.
In terms of a full economic recovery here at home, Kohl says that it won’t happen until California, Texas and Florida — which account for a major portion of the country’s gross domestic product — start making a comeback.
And while the ag sector has been cheering for better trade terms with China, Kohl says that he isn’t so optimistic. For one thing, China has been pursuing power and investing more than $1 trillion in emerging countries and ag hot spots to increase its own influence.
Being too dependent on China for exports is a big gamble, Kohl says, especially as it works to become the world’s military and economic power of the future.
A big question is whether the U.S. will enter the Trans-Pacific Partnership to buffer China’s influence. Tom Vilsack, the nominee for U.S. secretary of agriculture who served under former President Barack Obama, once was in favor of TPP when it was first under consideration during the Obama administration.
“From an ag industry standpoint, watch this agreement. It will be very critical,” Kohl says.
The government’s stimulus checks might be helping some, but someone will end up paying for it at some point.
“That means taxes are going to go up,” he says, whether it means higher federal or state income taxes, or an adjustment to the estate tax that would be harmful to agriculture.
Kohl says that he’s also keeping an eye on the growing market for non-meat and non-dairy alternatives, and how this will affect agriculture. McDonald’s is launching the McPlant burger — a plant-based burger produced with Beyond Meat — which he says is a big deal considering it’s the second-largest restaurant chain in the world. Plant-based burgers are now cheaper to produce and are now nearly as competitive in price as traditional meat.
A possible rise in the minimum wage to $15 an hour also is something to keep an eye on. Several states, including New York — which is at $12.50 right now, $15 for New York City — have already raised minimum wage, but Kohl thinks a nationwide $15 minimum wage would be disastrous for small businesses, including farms.
The Congressional Budget Office has stated that raising the minimum wage to $15 an hour by 2025 would cost at least 1.4 million jobs, but it would raise wages for at least 17 million people.
There is still a question of whether the Biden administration will continue the Coronavirus Food Assistance program. CFAP and other government help contributed to a 43% boost in 2020 net farm income, but Kohl warns against making business decisions based on government help.
“Don’t make long-term decision on one-off income. It will get you in trouble every time,” he says.
Manage for uncertainty
So what are some things you can do to better plan for uncertainty? Develop an action plan.
Kohl suggested several items to look at, including developing a written farm budget and comparing it to the year-end farm budget; evaluating the budget as conditions change; writing a personal and family living budget; reestablishing personal and professional goals and objectives; communicating with your advisory team; and developing a risk management plan.
Signs that you’re doing well
If you’re not so sure you’re doing well, it might be a good time to look at Kohl’s 15 “good problems” to have:
1. You have to pay a lot of income taxes. “That means you’re profitable, but find the sweet spot of taxes vs. deductions,” he said.
2. Your lender wants to lend you more money.
3. You have growth frustrations.
4. Everyone wants to work for you.
5. Your business has cash sitting around.
6. The older generation wants to exit, and they have at least 50% of retirement income generated from sales outside the farm business.
7. You have time for family and friends.
8. You could walk away for one month and the business operates just fine.
9. You left money on the table when marketing this year's crop or livestock.
10. The younger generation spends too much time in the office on the computer and in the books. “This is where the money is made, but the younger generation should get out in the dirt,” Kohl said.
11. You must spend money on a facilitator and team of advisers for your transition and estate plan. “If you don't do this there will be a winner, and that's Uncle Sam, and accountants and lawyers,” Kohl said.
12. Your neighbor comments that you spend too much time at seminars, conferences and other things.
13. Even though you're financially successful, you still spend time refining the business plan.
14. You don't have to bring your personal checkbook to the board meeting.
15. Mom, Dad, Grandma and Grandpa are upset about those tough questions that you are asking in developing the business plan.