AgOutlook speakers: No plan, no survival

SIOUX FALLS, S.D. -- The world and regional agricultural picture is filled with volatility, and plans sometimes don't work out, but that is not a reason not to plan.

SIOUX FALLS, S.D. -- The world and regional agricultural picture is filled with volatility, and plans sometimes don't work out, but that is not a reason not to plan.

That was an apt message at an AgOutlook 2009 conference and trade show drew some 650 farmers.

Among the speakers was David Kohl, an economist and professor emeritus of agriculture and applied economics at Virginia Tech in Blacksburg, Va.

An agricultural globetrotter, Kohl sees an extended "period of economic moderation worldwide," with volatility at the extremes, followed by short periods of calm.

"If you can't handle volatility, agriculture is not the business you want to be in," Kohl says.


Kohl says the U.S. economy has experienced a "false world" of 15 to 20 years of asset appreciation. Two-thirds of the world economy is now effectively in recession, he says.

China is the key -- reducing 7 percent to 8 percent in the past year, compared with its previous clip of 10 percent plus per year. If the Chinese economy comes down to 3 percent to 5 percent annual growth, that will reduce oil prices, which in turn will cut prices of U.S. farm commodities.

Plan, plan, plan

Kohl urges farmers to watch for unconventional signs of economic health.

Besides reading two hours a day, Kohl says he talks to people on the street. One of his favorite signals is what overland truck drivers tell him how about their backhauls. Many economists insulate themselves and look for mathematical models, based on numbers.

"Usually, your stress cracks occur outside the numbers," he says.

Kohl says farmers must "plan, plan, plan," and bring in their lenders and other experts to help them make decisions.

"Someone said they had to go to six meetings to figure out the ACRE (Average Crop Revenue Election) program, and now they're going to have to go to 12. It's going to be complex; don't go it alone," he says.


Land value is a big concern.

He says land now is 87 percent of the balance sheet for U.S. farmers, primarily because land values have inflated. He says landowners should be careful not to try to extract excessive rent from renters.

Farmers are going to need to control costs, including family living costs, which now are averaging in the $65,000 to $100,000 range.

Kluis notes that land is a "wealth accumulator and not a cash flow generator."

He says that while many of today's land deals are in cash, these older buyers are "locking up their cash in land" and eventually will need the cash. He is "a little bearish" on land values, but notes that this is "very regional."

Tread cautiously

Heading into 2009, farmers must be very careful about who they're dealing with because often they are unsecured creditors.

"If the agribusiness firm goes down, you've lost," he says.


He warns farmers about making financial commitments now that will cut taxes, but will make commitments for the next five years.

"One key is to keep your overhead costs low -- particularly in this period of time," he says.

He says farmers should check their credit scores.

"Seven hundred is going to be the magic number up in this neck of the woods," he says. "If you're below 650, or if your spouse is below 650, they're going to take a second look."

One buzz at the convention, sponsored by the South Dakota Soybean Association, was the buzz about the fate of the ethanol industry. Recently, farmers with delivery contracts for ethanol companies in Chapter 11 bankruptcy protection are finding out that they must deliver on contracts at lower, current market prices, even though those contracts were created at higher prices.

Alan Kluis, president of Kluis Commodities of Wayzata, Minn., and a national magazine columnist, says some 7,000 producers are in that position, and some may be hurt badly because of it. During the next few years, Kluis says he sees no burdensome stocks of corn. In the next four years, he sees corn acres increasing by 1 million to 2 million acres a year, with yields going up by 2 percent.

Acres for corn and soybeans will come out of cotton, wheat and expiring Conservation Reserve Program acres.

He says one or two weather situations will create reasonable profitable selling situations from 2008 crops and into 2009.


"Don't expect the windfall profits you had the last two years," he says.

Kluis sees petroleum and other petroleum-related prices recovering into 2009 and says farmers would be wise to lock in these inputs at current lower prices.

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