January 7, 2019

DrKohl_color The Ag Globe Trotter

Dr. Dave M. Kohl

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

The title “Eighteen for Eighteen” sounds like an ESPN documentary focusing on a sports story. Others may think I am in Omaha, thinking of number 18 Peyton Manning and his audible call at the line of scrimmage. Yes, I am writing this article from Omaha as a result of an East Coast snowstorm that created a diversion in my travel schedule. With this backdrop, let's examine 18 perspectives that 2018 presented the agriculture industry.

Trade issues
Recently at a seminar, approximately 400 producers used clicker technology to give anonymous responses on their top concerns. Trade restrictions and overall turmoil came to the top of the list encompassing nearly 30 percent of the responses. In the short run, some industries and commodities have taken the brunt of the impact with lower prices and more volatility; however, will these disruptions create long-term trust issues with many global trading partners in the long run? Trust, once violated, negates a relationship.

Technology and innovation
Technology and innovation are often highlighted as the top factors impacting agriculture operations, as indicated by the producer survey. Technology is also being applied globally. For example, as a result of technology and more land in production, corn production has increased by nearly 100 percent since 2009 in Brazil and Argentina. Seed technology and changing climate have resulted in soybeans being one of the largest crops in Canada. Moving forward, technology and innovation resulting in both higher yields and increased efficiency will be an important part of every producer’s game plan.

Females in agriculture
Youth organizations such as 4-H, FFA and others are the foretellers of the future of the agriculture industry, with over 50 percent of the membership being female, and 75 percent of those in leadership positions being female. Females in the agriculture industry, ranging from farming and ranching to lending, agribusiness and public policy will be much more pronounced in the future.

Interest rates
After a decade of low and stable interest rates, increases are in place and on the horizon. In a rising interest rate environment, it will be even more critical for farmers and ranchers to test the sensitivity of financial shocks on their cash flow related to variable interest rates.

The year 2018 was the year NGOs, or non-government organizations, arrived in full force. The Smithfield and Monsanto lawsuits are only the beginning. These forces could shape the future structure of the agriculture industry.

Barbell effect of agricultural lending
The barbell effect is in place in agricultural lending. At one end of the spectrum reside the baby boomer lenders of the 1980s, who are now accelerating into retirement. On the other end are the newbie lenders with less than five years of experience. Recruiting and retention of these new agriculture lenders will be a top priority for many lending institutions.

Cash flow works
What is the most important business tool used in today's farming and ranching? The survey respondents indicated that it is cash flow projections. Developing a projected cash flow and monitoring it on a monthly and quarterly basis is a tool of the times in this phase of the economic cycle.

Interest rate direction
How fast and how high? Watch two critical elements to help forecast the direction and magnitude of interest rate increases: unemployment rate that is less than 4 percent or in the upper 3 percent range; and inflation moving toward 3 percent. These would be strong signals for interest rate increases. That being said, interest rates are generally linked to the urban and the general economies, not the agricultural economy.

Two headwinds: rates and the U.S. dollar
The aforementioned increase in interest rates is usually indicative of a strong economy. Higher rates often result in a stronger U.S. dollar, inhibiting agriculture exports because they are more expensive to trading partners. It represents a “double whammy” to the industry.

Efficiency versus growth
I often refer to the saying, “Better is better before bigger is better,” which emphasizes efficiency before growth. This is generally a sound principle. In my travels and engagement with the industry, more efficient water management systems; seed and fertilizer applications through precision agriculture; and robotics are driving efficiency in the agricultural business models.

Business partners outside the family
An increasing amount of children of farm and ranch families have no desire to return to the farm business. Approximately 20 percent of farms and ranches have no next generation to return. Matching retiring family business members with aspiring partners outside the family has started to gain momentum, particularly in 2018.

Business IQ: the difference maker
Now in the sixth year of the economic reset, the business IQ of the business owners and management teams is paying dividends. In an economic cycle that requires base hits versus home runs in cash flow and profits, honing these business skills through educational programs are a high priority.

Real estate taxes and healthcare
Two major concerns among producers nationwide are rising real estate taxes on farm real estate and the cost of health insurance, which is now often the largest expense in the family living budget. Rising real estate taxes squeeze profit margins, and affordable health insurance is critical from a financial standpoint as well as for the well-being of producers and their families.

Strategic keywords
Billions of dollars of venture capital are pouring into the food sector. Big data, blockchain technology, transparency and traceability will be key words in the vocabulary of future agriculturalists. These will be topics of the future, influencing management decisions in the next decade.

The consumer
Younger consumers, including millennials, Generation Z, and the new Generation A, are driving the dynamics of the food, fiber and fuel sector. The trends toward vegan, beyond meat and alternative milk sources with a twist toward environmental and animal welfare accelerated in 2018. Will this shape agriculture in the decade of the 2020s? Only time will tell.

Young people in agriculture
A university degree, while valuable, will be challenged by vocational and technical schools and community college certificates. The ability to analyze data, critically think about what information is saying and communicate information in written form, orally and nonverbally will be differentiators in the young people of the future. Listening skills will also be important.

Many principles regarding work culture from the athletic arena and corporate organizations apply to farm and ranch families as well. The “free fuel” that is often underestimated is the AREs: Appreciation, Recognition and Encouragement (coined by Disney).

The family
Ask many farmers and ranchers, “What is the best crop you raise?” Often their response will involve raising their family in an agricultural environment. Spending time outdoors and interacting with nature is a benefit often underestimated in the development of youth and for the peace of mind of adults.

These 18 perspectives to close down 2018 are designed to get people to reflect on the past year and think about the future. Remember to focus on managing the elements that you can manage, and manage around the other uncontrollable factors.