The Ag Globe TrotterDr. Dave M. Kohl
Welcome to the weekly edition of The Ag Globe Trotter by Dr. Dave Kohl.
The COVID-19 pandemic is a black swan event that has, like many previous unexpected events, accelerated changes in business, consumer and societal trends. Within that context, what other U.S. and global trends will impact strategic plans of the agriculture industry in the coming decade?
Overall, the 21st century, when contrasted to the 20th century, will evolve from a time period centered on physics to one emerging with biology and bio-shocks. Fears of possible nuclear and chemical warfare in the last century have now become threats of disease outbreaks combined with grid and technology disruptions. Preventative measures to improve human health based on real-time data that is customized to each individual and available on mobile devices will truly be a test of high-tech, high-touch advancements. “Sterile” households with minimal exposure to the outdoors will create an environment for increased bio-shocks. This introduction leads to further discussion of the mega trend accelerators that will simultaneously challenge and provide opportunity for the agriculture industry.
The Rise of Asia
Global economic power centers have shifted throughout history. For centuries, economic dominance resided in the Asian region, with China being the central player. Early in the 1800s, China produced as much as 30% of the global gross domestic product (GDP). The opium wars and the rise of the Industrial Revolution shifted the economic power center to Europe, with much of the Southern Hemisphere being colonized by European nations to provide raw materials. The rise of the United States and North America, particularly before and just after World War II, brought dominance to this region of the globe generating over 25% of the world's GDP.
In the 1990s, China produced about 2% of the world’s GDP. Three decades later, China has seen one of the most rapid economic ascents in history and now comprises 16.8% of the world’s GDP. Initially, world economic market share was taken from Europe and Japan, but in this decade, competitive pressures will be on North America and, to some extent, Europe. The Asian Rim, representing nearly 4 billion people and between 30%-40% of the global purchasing power, will be a high priority for the agriculture industry’s strategic plan.
The balance of power in global trade may be intertwined in trade agreements this decade. The Regional Comprehensive Economic Partnership (RCEP) is a trade agreement, spearheaded by China, between 15 Asian nations and will create a powerful economic block. This trade agreement represents 2.7 billion people, over one quarter of the world’s economy and $12.5 trillion in global trade value. Asia’s closer ties to Europe and South America through trade agreements and the Belt and Road Initiative will be an influencer of global economic power shifts.
An accelerating trend of the 2020s will be government subsidies for agriculture shifting from direct payment programs to more payments benefiting the environment. This could include practices to improve soil and water health, and air quality. Expect China to present the image of leading the way on these initiatives. In the rich nations of the world, one positive outcome is that the non-farming public’s perception of the agriculture industry as an environmental problem could be changed to the solution. The integration of biotechnology emerging with predictive analytics through data, information, engineering technology and artificial intelligence will be a linkage that will create transparency in the overall food and fiber system.
After two decades of stability in energy prices, expect volatility to increase. The direction and initiatives of the green economy will result in the unraveling of the fossil fuel complex in some areas of the globe. This will create temporary supply and demand imbalances, which will drive consumer behavior that is sensitive to these price shifts. The agriculture industry, ranging from production to distribution, is susceptible to these imbalances and will require a risk management plan for energy. On a side note, the more society becomes dependent on one source of energy or technology, the more countries will be impacted by possible black swan events. These future black swan events could be a result of supply and distribution chain issues, internal or external terrorist attacks, or the vengeance bestowed by weather events.
A recent trend discussed in previous articles is the deurbanization trend in the U.S.; however, this trend is occurring in many other parts of the world as well. For example, the younger generation in China has a desire to move back to rural areas. Up to 60% of young Chinese citizens want to start their own business. The lower costs, less pollution and congestion, and bio-shocks have accelerated this trend in rural China. The same attributes observed in China are creating a rural renaissance in the United States, Canada and, to some extent, Europe.
Consumer Production Paradigms
The traditional agriculture industry will experience increased competition from nontraditional agricultural products. Plant based meats and nondairy alternatives will influence the economics of both the livestock and grain industries. The pandemic accelerated this trend. With plants being shut down, shortages of traditional products allowed this new segment to expand in the marketplace. These new products are backed by powerful capital funds and influencers using both social and mainstream media to promote their products. Innovative packaging, driving lower costs and the green movement provide a powerful competitive strategy here in the U.S. and around the globe. This is reflected in young Chinese consumers who are substituting these alternative products for the regular fare of the past. This trend can influence the agriculture industry’s strategy around the world.
Stimulus Checks and Stock Markets
Government debt has ballooned in recent years and has been accelerated by the COVID-19 pandemic. U.S. federal debt to GDP is now above 100%, which is a level not seen since World War II. This trend is occurring in many major economies globally, including China. While low interest rates have lessened the burden concerning debt service, liquidity or inflation shocks could quickly change the fortunes of major economic players. The possibility of a 100-basis point rise in treasuries, or back to more “normal” interest rates, would increase the debt service on the national debt in the United States to greater than the military budget. A drag on world economic growth in this decade could lead to disruptions in the U.S. economy, which could stifle growth and increase the federal debt.
There is an old saying that “If it grows too fast, it is a weed.” Equity markets, particularly here in the U.S., have observed a dangerous confluence of events. Institutional investors, coupled with day traders who have time on their hands due to the pandemic and a gambling mindset, have created a dangerous combination. The movement out on the equity risk curve has also been accelerated by accommodative monetary and fiscal policy. Any dramatic change in the aforementioned variables could cause a dramatic downside shift in worldwide wealth, impacting consumer behavior.
Management and accountability mindset
Whether it’s businesses, households or governments around the world, eventually the “chickens will come home to roost.” Sound finance and management principles for businesses, households and governments will be imperative at all levels to maintain competitiveness. Discipline, accountability, reasoning and critical thinking will be needed by individuals, families and organizations. These skills can reposition a disruptive challenge as an opportunity in a global economic environment with accelerating trends.