Economic outlook for ag

by Deborah Jeanne Sergeant

CLYDE, NY — It’s easy to get nearsighted with the activities on one’s own farm and lose touch with industry trends. That’s why David M. Kohl, Ph.D., professor emeritus, Agricultural and Applied Economics College of Agriculture & Life Sciences at Virginia Tech, presented “Economic Radar Screen 2019-2020” at a recent open house at A.N. Martin Systems, LLC.

Kohl views international trade as a big factor in today’s agricultural scene. He said if the United States-Mexico-Canada Agreement (USMCA) is ratified “it’s not only ag but supply chain management and supply” that will be affected. He foresees a recession if USMCA doesn’t pass.

“Our biggest trading partners are in North America, which is 28 percent of the world economy,” Kohl added. “We need to keep it together. We’re all integrated.”

He said slowdowns in some parts of the world affect others, forming a synchronized global economic slowdown, noting that China has experienced its slowest growth rate in 28 years and the economies of Japan and Germany aren’t growing.

There’s also political uncertainty in Brazil, Venezuela, Mexico, Argentina, Germany, Britain, Europe and the United States.

“Global trade needs to be stabilized,” Kohl said. “We have political instability due to the 2020 election.”

Energy production represents a big factor in trade relations.

“Canada is the number-four energy producer and Mexico is number eight,” Kohl said. “We are diverse” in our energy sources.

That’s important, considering that energy is so important to farm operations.

Keeping strong trade relations is also vital to farms because one-fifth of net farm income is through exports. Kohl offered as examples the fact that one out of every seven days’ worth of milk is exported. Thirty percent of that goes to Mexico, amounting to $2 billion.

“Any of these trade deals will be very temporary,” Kohl said.

He advised farmers to “keep extra cash and working capital. It will position you to benefit from trade instability. We are coming into temporary agreements because of political jostling.”

International food trends also play a role. In China, the Belt & Road Initiative, like the Marshall Plan, is growing the nation’s economy. The Marshall Plan was a U.S. initiative that provided aid in Western Europe to rebuild infrastructure after World War II.

Kohl said of the Marshall Plan, “It was a great investment. China dusted off this initiative and has invested $158 billion since 2012. Up to $5 trillion investment is planned. You have to go where the money is: the Asian Rim. A lot of people are taking this passively.”

Kohl pointed out that Xi Jinping, the leader of China, has a degree in Agricultural Economics.

Kohl lauded President Trump’s appointment of Terry Branstad as ambassador to China because of his agricultural background.

“He’s a very powerful person in these negotiations,” Kohl said.

Kohl said the USDA reports agricultural export destination, in billions, include Canada ($21), China ($20), Mexico ($18), Europe ($12), Japan ($11), South Korea ($6), Hong Kong ($3.6), Taiwan ($3), Columbia ($2.4), Philippines ($2.3), and Vietnam ($2.2).

The percentage exports of total production from 2011-2013 are cotton (77 percent), tree nuts (72 percent), rice (52 percent), wheat (51 percent), soybeans (46 percent), fresh fruit (28 percent), processed vegetables (25 percent), pork (22 percent), poultry (19 percent) and milk (14 percent), according to USDA.

Kohl views North America as a strong player in world economy, touting its 28 percent of the global economy’s gross domestic product. But from 1990 to 2020, China has grown from 2 percent of the world’s economy to 14 percent, while the U.S. has decreased from 23 percent to 21 percent.

Kohl said the future on agriculture depends heavily upon oil and energy economics. The terrorist attacks on Sept. 11 spurred the U.S. to become the globe’s major energy producer, improve efficiency and explore alternative energy such as solar, wind and electric.

“We are very diversified,” Kohl said. “We have ethanol and fracking but our landscape is changing fast. That’s good for ag, as $8 of every $10 spent is for energy expenses.”

Real estate is also pivotal in agriculture. Kohl said many young farmers ask him, “Should I buy farm land?”

He quipped that it’s like having a baby.

“You can’t afford it, but you find a way,” he said.

Farm real estate appreciated or stayed level 79 percent of the years from 1910 through 2017, making it a pretty decent investment. Since World War II (1941), it appreciated or stayed level 88 percent of the years.

Between 1910 and 1940, farm real estate appreciated only 57 percent of the years. It was flat or declined for 13 years from 1920 through 1933 during the Great Depression. It declined during four years in the 1980s.

Unlike the agricultural downturn in the 1980s, farmland isn’t declining in value now because of crop insurance, “a critical tool for asset management,” Kohl said.

There’s also the effect of investors, such as farm credit and agricultural bankers that can help farmers refinance and stay in business.

Kohl views bankruptcy numbers as a poor indicator of farmer stress. He believes the number of refinances as a more accurate barometer.

“Land equity is a great bridge over troubled financial waters,” Kohl said. “But if you don’t improve cash flow, it’s going to take you to the end of the pier.”

He thinks that baby boomers will keep buying farmlands for another seven years.

Among dietary trends for 2020 through 2030, Kohl believes the demand for cultured meat, non-meat and non-dairy beverages will continue to affect ag, along with veganism and concern about environmental footprint.

He thinks that farmers tend to be “too U.S.-centric” and not interested enough in exporting products.

“Ninety-five percent of success is the aligment of resources, talents, and markets,” Kohl said.

He views more consumers wanting transparency, customization, personalization and products and services that deliver an experience.

“In the next 10 years, blockchain (technology) is going to change ag,” Kohl said. “When we start looking at the industry, this will drive it.”

While he disagrees with the notion that the small farm is extinct, he said the successful small farms have reinvented themselves or sought additional revenue streams to diversify their income, such as value-added products or agritourism.

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