March 31, 2020

DrKohl_color The Ag Globe Trotter

Dr. Dave M. Kohl

Welcome to the weekly edition of The Ag Globe Trotter by Dr. Dave Kohl.

Over the years, one of the megatrends I have discussed in many presentations is the potential for “black swan” events, ranging from a cyberattack or network power failure, to a terrorist attack or even disease outbreak, such as a pandemic. Jokingly, some people have always provided me with a good “ribbing” on these points that never seem to occur. It is interesting that those same people are now emailing and calling to discuss the implications of COVID-19, the great disruptor. 

This pandemic has been brewing for a number of years. While some outbreaks such as SARS and the swine flu have been confined, this one got out of the box. Expect more of these outbreaks in the future as people are more mobile, live close to one another in urban environments, and have lived in a sterile environment. Sometimes a little dirt or manure and being out in the environment builds up antibodies.

This research briefing is positioned not for potential solutions, but to cover some of the possible implications to be discussed from the kitchen table to the board room. The events unfolding at the time of writing remind me of an air travel event that happened back in 1989. The flight was flying from Denver to Chicago. I had been on the same flight one week earlier to the day that this aviation black swan event occurred. To make a long story short, the flight systems in the back of the plane prevented control of the plane. 

The pilot diverted to Sioux City, Iowa, without controls. He solicited support from a passenger who was on the manifest who happened to teach systems operations. Through teamwork, they were able to take a near-fatal experience for everyone on board to one in which the loss of life was reduced substantially. They were creating the flight manual as they descended into a survivable crash in a cornfield next to the Sioux City airport. It is interesting that over the years I have actually taught and discussed this event with people who were on this airliner including nurses and a farmer who actually watched the plane fly into the cornfield. 

This story is a backdrop to the events unfolding with COVID-19. Whether it is government, business institutions or personal households, the flight manual will be developed as we go into uncharted waters. Yes, there will be some casualties; however, this disruptor will have some possible strategic implications for the board room and everyday life. Let's examine a few of these. 

Supply Chain Disruption 
Globalization in recent decades combined with technological advancements have created business models of efficiency and just-in-time management. Throughout the agriculture, manufacturing, technology and production supply chains was the idea that the most efficient and optimized was the best mode of operation. For example, many rare earth metals used in technology are mined in China. Pharmaceuticals to hockey sticks are produced in the lowest-cost areas of the globe.

One of the discussions will be whether this optimal efficiency is best for a resilient economy or nation, or to some extent the agricultural industry. Some of this discussion was present with the tariffs and the sanctions that created disruption in agriculture and manufacturing. COVID-19 has expanded uncertainty to technology, goods and supplies used for the basics in everyday life.

This event has been a disruptor of the shipment of goods and supplies. Many shipping lanes globally have been impacted because of biosecurity of the workers at the ports. The shipment of goods throughout the nation, regionally and locally have also been impacted.

While a regional port issue has been observed in the past on the West Coast, which disrupted shipments and impacted farmers and ranchers, this one is different. This one is disease oriented and global and could return in coming years at a moment’s notice. This disruption creates both supply and demand imbalances, which could result in inflationary or deflationary effects through scarcity or an abundance of goods.

Behavioral Economics in Action
Behavioral economics is in full play as a result of this event. Look at dramatic shifts in the equity markets in the U.S. and abroad to shortages of toilet paper and basic essentials. Armed guards at a grocery store, photos of lockdowns and discussions of social distancing only magnify this concept of behavioral economics.

In studying the implications of this disruptor, one must dust off the old basics taught in psychology: Maslow's hierarchy of needs. In the United States and many of the rich nations of the world in recent years, many individuals were at the peak of the pyramid reaching self-actualization. However, this quickly descended the pyramid in a matter of a month to the needs of emotional support and basic physiological needs. Will people be able to have a plentiful supply of food? Will shelter or housing be in jeopardy? Can one receive medical care? These basics of life are important. Others are reaching out for individual and community support, moving up the hierarchy of needs.

The implications of this black swan may be a positive to agriculture. Perhaps the agriculture industry and those who produce basic goods will gain a higher priority in society. The importance of transparency regarding where the food is produced, processed and distributed may have a renaissance. Variables such as soil health and water quality for the long run may have increased importance. This can be a strategic advantage of North American agriculture compared to other parts of the globe. As one Midwest Amish farmer stated, “healthy soil leads to a healthy plant, which leads to a healthy animal, a healthy human being and also a healthy environment.” One must critically think through these points when examining the origin of some of these outbreaks.

Hard Assets
Another impact to agriculture centers on hard asset investments such as farm and ranch land. With uncertainty in global equity markets, will there be a movement to hard asset investments such as land and natural resources such as water and minerals connected to the land? In recent years, baby boomer farmers and ranchers have invested in farmland as opposed to the equity markets. Will this accelerate, and will farm and ranch land be appealing to outside investors? On the other side, will global government stimulus lead to dramatic increases in interest rates impacting farmland values? How will these variables impact young farmers and ranchers and their business models in the future?

It appears a U.S. and global recession are inevitable. The Index of Consumer Sentiment, Purchasing Manager Index (PMI) and Unemployment Rate will have to be closely monitored on the economic dashboard. Expect the Index of Consumer Sentiment to quickly decrease from 90 to 100 to under 70. The PMI of rich nations will most likely fall under 40, indicative of a recession. The U-3 and U-6 unemployment rates could be in the range of 12% to over 20%. Workers will be available for the agriculture sector; the question is whether they have the work ethic and the skills needed to efficiently complete the tasks. Rather than being V-shaped, this recession most likely will be L-shaped as confidence and human behavior have been challenged not only in the short run, but in the long run.

In the crosshairs of the implications will be the methods of social interaction and delivery of education. School systems ranging from preschool to universities will be challenged on delivery systems. Online education will be accelerated at all levels and will result in some challenges. Do eLearning systems have the capability to deliver? Will teachers and educators adapt well and what will be the outcome for our students?

Perhaps blended education, the best of high-tech and high-touch, will be the model of access to school systems and adult education. Certificates may replace degrees and universities will be designed for social interaction in a blended educational experience. Will this new methodology drive down the cost of education and expand it to all segments of society as a lifetime educational journey? 

In the next few months, a side-by-side relationship between farmers and ranchers and their lenders will be a high priority. Relationship lending, whether it is high-tech, high-touch or a combination, must be innovative and adaptive. Agriculture is poised to be reenergized in importance and taken to the next level by our agriculture producers and industry leadership.

This article was written in mid-March 2020. It is written based upon many years of experience on the road, underpinned by the wisdom and vision in the valley of the Blue Ridge Mountains. The purpose of this article is to stimulate thinking as we modify our flight plan for a positive outcome, despite unfortunate events that are disruptors.