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Kohl advises farmers how to navigate ‘economic reset’
By SEAN CLOUGHERTY
WILLIAMSBURG, Va. (Feb. 23, 2016) — The next few years in agriculture, what Dr. David Kohl, Virginia Tech ag economist calls “the economic reset,” will present major challenges to farmers who became used to high crop prices but also present opportunities for farmers who are positioned to take advantage of them.
“Some of the best business models were built in the 1980s when times were tough,” Kohl said. “When times are good we can sure get complacent.”
Speaking at the Virginia Grain and Soybean annual conference, Kohl said the main factors that caused the last commodity super cycle in crop prices will be key in how the next four to five years play out.
Emerging nations such as Brazil, China, India and Russia which had rapid growth but recently are slowing growth or in a recession.
“In other words, they brought it up and now they’re bringing it downit he said. “Keep an eye on these nations because it has an impact on the core of America. It used to be the world revolved around us. Now we depend on the world and we’re in this world marketplace.”
Ethanol production, which increased corn usage from 8 percent of production to 33 percent since 1998 is a maturing industry, according to Kohl, and facilities will have to rely on their efficiency to stay viable.
Oil prices will remain a precursor to changes up or down in the world economy, he added, as it has in each recession since 1969.
“Developed nations don’t like oil too high because it hurts the pocketbook,” Kohl said. “Emerging nations don’t like oil too low because it hurts their entitlements. Hope you all heard that, she’s a disruptor.”
Moves by the U.S. Federal Reserve bank are another factor to watch. The bank contributed to the commodity super cycle years ago by pumping money into the economy which devalued the dollar and helped U.S. farm exports and keeping interest rates low motivated farmland purchases but now other countries are making similar moves.
“What’s happening is it’s the battle of currencies around the world and who’s right in the crosshairs? We are,” Kohl said. Weather, the ultimate variable, is the fourth main factor Kohl discussed.
Similar to the wider gap in economic volatility, there will be more extremes in the weather but advances in weather technology will be opportunities for some farmers.
“In the next five years, you’re going to have weather apps right down to your farm. It’s not about putting your inputs on, it’s about putting them on at the right temperature, the right moisture. That’s going to gain you efficiencies.”
It’s also going to produce a lot of data, which Kohl said will have value to companies in the future.
To weather the economic reset, Kohl urged farmers to get back to basics of strategic planning.
“One of the things you’re going to have to have is much more stretch in your financial waistband,” he said. “Equity does not pay the bills. Profit and cash flow and working capital are what keeps you in business. Remember this, cash is king and profits is your kingdom.”
First step is for each member of the farm operation to write down one-year and five-year goals for the business and their family. Only four percent of farmers do this, Kohl said but added he refuses to work with anyone who doesn’t.
“It’s very very important that everyone articulate their goals in writing for communication. They’ve got to know where you’re coming from.”
Creating cash flow projections under several different scenarios is another step along with keeping a balance sheet that shows earned net worth. Kohl also said farmers need to keep up to date on their cost of production.
“That’s very critical because in this reset environment, you’ve got to know which enterprises are going to get you the bucks so you can apply your resources there,” he said.
Kohl’s last step was to share the plan with a trusted advisor and your lender as soon as possible for feedback, advice and to strengthen communication.