December 22, 2016
Agriculture is in what David Kohl calls the "mid-innings" of the economic reset. "Right now what people are doing is burning through cash and working capital," Kohl, professor emeritus at Virginia Tech University and renowned ag economist, told farmers and ranchers attending Nebraska Farm Bureau's 99th annual meeting. "Eventually as it continues on, people will start burning through land equity. Once they start burning through the land equity, you'll be in the transformative stage."
Now in the third year of this economic reset, Kohl outlined four things to watch in the years ahead:
1. Emerging international markets. This includes the BRICS and KIMT countries — Brazil, Russia, India, China and South Africa; and South Korea, Indonesia, Mexico and Turkey.
"Remember about four or five years ago, those countries represented about 58% of world economic growth?" Kohl asks. "They were creating a middle class the size of the United States of America every seven years, and you know what they were demanding? Food, fiber and fuel."
It will also be important to watch the new Trump administration. Simplification of the tax code and regulatory reform are two key components President-elect Donald Trump campaigned on, and while that's good news for agriculture, Kohl adds farmers and ranchers should keep a close eye on international trade, including the Trans-Pacific Partnership (TPP) and the NAFTA (North Atlantic Free Trade Agreement).
"We export 25% of our products," he says. "We're going to have to watch this in the first couple years."
2. Oil. Oil has been a key indicator of every economic recession since 1969, Kohl notes. "Eight out of every 10 dollars you spend on your farm and ranch business is connected to oil," he says. "There should be some good news coming this year. When you do your year-end financials, you should see reduced cost because of oil."
Meanwhile, the U.S. oil industry has been cutting costs and improving efficiency; companies in North Dakota and West Texas have been able to profitably extract oil at around $40 a barrel. "The United States of America wanted to become energy-independent. They said it was going to take 25 years, and we did it in about nine years," Kohl says. "Never underestimate the power of innovation before technology."
3. The Federal Reserve. Kohl says after coming off of a period of low interest rates, there's a strong likelihood the Federal Reserve will raise interest rates.
It's also important to watch for unintended consequences. During the recent recession, the Federal Reserve implemented quantitative easing to increase the federal balance sheet to $4.5 trillion, which devalued the dollar and maintained low interest rates up until 2015.
"It basically put us on steroids," Kohl says. That is, the devalued dollar enhanced export potential to emerging nations leading to record profits in the ag sector, he says. Meanwhile, inflated land values meant investors were more interested in farmland.
"You aren't going to put money on Wall Street because you don't trust it, you aren't going to put it in the bank because you aren't going to get much return there," Kohl adds. "So what was the investment of choice? Farmland. We inflated farmland by about 40%. That was the unintended consequences."
4. The weather. It goes without saying that weather plays a big role in agricultural yields and markets. With that in mind, Kohl advises growers to pay close attention to weather forecasts — not just within their own regions, but around the world.
Kohl, recently toured the northwestern U.S. with Eric Snodgrass, director of undergraduate studies at the Department of Atmospheric Sciences at the University of Illinois. "He says we're going to go into this period of weather, where you're going to go into an extended dry periods followed by intense rainfalls," Kohl says. "One of the things that can change this [economic situation] very, very quickly is going to be weather, but it will not be a long-term change."
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