‘Great Super Cycle’ boosts agBut don’t get overconfident, ag economist advises.
By: Jonathan Knutson, Agweek
MAHNOMEN, Minn. — U.S. agriculture is thriving during a rare “Great Super Cycle.” But success has created a “new normal (that) makes us very, very fragile,” according to an agricultural economist.
To survive what comes next — be that a crash or merely a correction — agriculturalists need to prepare for the unexpected, says David Kohl, professor emeritus of agriculture and applied economics at Virginia Tech in Blacksburg, Va.
Kohl spoke Feb. 26 at the annual Ag Trends Conference in Mahnomen, Minn. The event, sponsored by 75 area businesses, drew 260 people. Most of the attendees lived within 90 miles of Mahnomen, a town of 1,200 in northwest Minnesota.
Kohl looked at four economic “Super Cycles” that have impacted U.S. ag in the past century. They occurred in 1914 to 17, 1950 to 57, 1973 to 74 and 2003 to the present. The first three all ended in an economic crash.
Older agriculturalists remember the 1980s’ crash, which included a huge drop in land prices. The current boom, which is fueled by many factors, including federally subsidized crop insurance, low interest rates and bioenergy, has caused land prices to soar, Kohl says.
Farmers today generally have used cash to buy higher-priced land. Lately, however, some producers are using equity, not cash, for the down payment on land, which is troubling, he says.
Other troubling signs include that fact that marginal land is bringing premium price, outside investors are in the marketplace for farmland and land prices in some areas rises more than 10 percent per year.
Kohl, who speaks to ag groups across the country, says he sees four main emotions among producers: greed, concern or anxiety, complacency and optimism.
One thing is uncertain, he says. The boom won’t continue forever.
“When this thing comes to the end, it probably will be (because of) something none of us expect,” he says. “It will be that unusual event, a ‘black swan’ event.”
Such an event, which can be positive or negative. is random and unexpected.
Ag producers, then, “need to plan for the unexpected,” Kohl says.
One way of doing that is stockpiling working capital to help the ag business weather tough times, he says.
He recommends that producers have a working capital to revenue ratio that exceeds 33 percent.
Many current ag producers are too young to remember the crash in the 1980s, he says.
“The key for the next generation is their ability to take a punch.”
Kohl has a number of suggestions for ag producers.
For example, producers too often focus on their cost of their labor, rather than its quality, he says.
“It’s not about cheap. It’s about aligning with talent (and) getting the right people around you.”
Other observations include:
•Young farmers should ask older producers about the biggest mistakes they’ve made.
•Today’s extreme market volatility creates opportunity, both good and bad.
“There will be more opportunity in the next seven years than in the past 30 years, (including) more opportunity to fail.”
•Agriculturalists should guard against arrogance.
“American ag needs a slap in the face. We need to remember where we came from.”
•When a family ag operation passes to the next generation, at least half of the older generation’s retirement income should come from Social Security and off-farm income.
If the retired generation relies too heavily on farm income, the farm and the next generation could be hurt financially.
•“The key to being profitable is developing a system of production, operation, risk management and finance (and) tweak it as the environment changes.”
Kohl also notes how producers concerns have changed since 2000.
Back then, producers were worried primarily about government supports and the cost of land, machinery and inputs.
Today, producers’ concerns include technology, maximizing yields, retaining good workers, export marketing strategies and the availability of land and water.