Expert: Focus on ag marketing, financial fundamentals in lean times
MOORHEAD, Minn. — Farmers facing difficult economic volatility and slim profit margins need to stick to the fundamentals and watch the "leading" and not "lagging" indicators of recession, a nationally-known agricultural economist advises.
David Kohl, professor emeritus at Virginia Tech in Blacksburg, Va., spoke at the fifth annual Bell Bank symposiums in Moorhead and Fergus Falls in Minnesota on Monday, July 8, to an audience of ag professionals and farmers.
Kohl said trade negotiations are important with China, but more importantly in North America. He said it is critically important to get the United States-Mexico-Canada Agreement passed soon. He said Canada is No. 1 in agricultural trade with the U.S. and Mexico is No. 3. He said it's important both for supply chain management in agriculture, but also in energy because the U.S. ranks first, Canada fourth and Mexico eighth in energy production.
If the agreement isn't passed it could be one of the things that could "tip the U.S. into a recession."
China is critical for ag trade, but the Chinese are waiting out the U.S. presidential, and congressional races. "Manage around the uncontrollables because they are the uncontrollables," Kohl said.
Farmers need to know their cost of production and know each of their costs. "Make sure they cut the right costs. Don't cut crop insurance only to get hailed out," Kohl said.
Farmers need to be very proactive in their marketing and risk management programs. "If market conditions are so that they lock in a profit, take a little bit and lock in a profit," he said. "Yes, you're going to leave money on the table, but that's the nature of the business."
He said that in this environment, it's about "base hits, not home runs, and a lot of people are looking for those home runs." He said some of the farmers under pressure will take too many risks, need home runs and will lose their moral compass.
He said farmers need to focus on capital and human assets. "Every one of those assets have to be productive," he said.
Lynn Pauson, Bell Bank's director of agribusiness development, said there is a divergence—a number of producers "flying under the radar," with a "quiet sort of excellence." He said there also is a number where "the wolf really is at the door."
He said that in the "super cycle" of 2005 to 2012 high profits, about 60% of the farmers were doing really well, 30% were "doing OK," and 10% were troubled. Today, that's 10% doing really well, 60% "hanging in there" and 30% are "really struggling, and potentially exiting."
To enhance the bottom line, farmers need to focus on education to learn common sources of excellence. He said farmers often define success in how big a crop they raise, but they should shift into financial management and marketing.
"We still have too many people who do it once a year when they do a financial statement at the year-end, and quite frankly you need to do it numerous times throughout the year," he said.
Kohl said farmers and ag leaders often sense a too-rosy view of the future possibilities for agriculture, using the "lagging indicators" of bankruptcy levels and debt-to-asset ratios.
Instead, they need to watch the "leading indicators" of farm problems: amount of farmers refinancing loans, increasing accounts payable, the decline in working capital and partial asset liquidation.
He watches the "non-regulated shadow lenders," including ag suppliers on the "operating credit side of the balance sheet." As agriculture consolidates, he said credit concentrates and 10% to 12% of the farmers have two-thirds of the total debt. He said appraisals of various assets will become challenged, especially with specialized assets and fewer buyers.