Agricultural economist David Kohl is bullish about the long-term prospects for agriculture, but he sees challenges ahead for farmers during the next two to three years.
Kohl, a professor of agriculture and applied economics at Virginia Tech, spoke to an audience of more than 800 farmers on Jan. 29 attending the Wisconsin Corn/Soy Expo at Wisconsin Dells.
Kohl said the United States just came out of a "commodity super cycle" that saw commodity prices reach record highs during the past few years.
"From 2007 to 2012, producers made more money than they did during the previous 40 years combined," he noted.
The "commodity super cycle" lasted from 2002 to 2012.
He described the "commodity super cycle" as the fourth one since World War I. The first "super cycle" happened right after WWI. The second followed WWII as the United States helped rebuild Europe and Japan. The third came in the 1970s when Earl Butz, former U.S. agriculture secretary, told farmers to "plant fencerow to fencerow."
Kohl admitted he didn't see the "super cycle" from 2002 to 2012 coming. It occurred primarily because emerging nations including Brazil, Russia, South Africa and Korea experienced 57% of the growth. China also played a major role in the "super cycle."
"In 2011 and 2012, China used more concrete and steel than the U.S. used during the 20th century," he said. "China's economy has slowed down from double digits during the 'super cycle,' to 4%.
Kohl said now he is watching oil prices "very carefully. Since June, the price of oil has dropped from $110 per barrel to $48 in January. A $10 per barrel drop in the price of oil equals a 25-cent drop in the price of gas at the pump. In every recession since 1969, oil has been a key indicator -- either too high or too low. Keep your eye on oil. Sixty dollars a barrel I can handle -- $40 and $30 oil scares me."
Kohl noted that the U.S. has become dependent on trade with China, but he says that is not a good thing.
"Don't bet your farm on trade with China," he said. "Your biggest risk is trade -- foreign countries will giveth and they will taketh it away."
Kohl said for the past several years he has been telling young people to go into the livestock industry since many farmers switched from livestock to grain farmer during the past decade.
"The 'super cycle' sucked resources out of the livestock industry," he explained. "The 50- to 65-year-olds will not return to livestock farming, so there will be less people in the industry than there used to be."
Kohl said the peaks in the livestock cycle end abruptly.
"Dairy farmers are already seeing it with as much as a $6 per hundredweight drop in the milk price."
Kohl predicted farmers will be continuing to manage volatility in extremes.
"There will be more opportunity in agriculture over the next five to 10 years than there has been in the last 40, but there will also be more opportunity to fail," he said.
Kohl told grain farmers that 40% of the price they receive for corn and soybeans is connected to Federal Reserve action.
"In 2008, we were three weeks away from a Great Depression," Kohl explained. "The U.S. decided that wasn't going to happen and they pumped stimulus into the economy."
Kohl drew a line between the drop in interest rates, the Fed's stimulus action and the devalued dollar -- all of which encouraged production and exports of commodity crops.
"Washington, D.C., thinks they are in charge," he said. "The one who is really in charge is Mother Nature."
Kohl said grain producers are experiencing negative repayment ability this year.
"We are paying 2015 costs and getting paid in 2002-2007 prices. That is impacting repayment ability and liquidity," he said.
Kohl says while times are tough for grain producers right now, he is very optimistic about the future of agriculture but he told producers, "You need to get efficient before you get bigger."