December 31, 2021

DrKohl_color The Ag Globe Trotter

Dr. Dave M. Kohl

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

Approximately two years ago, rumors were prevalent in the airport clubs about a virus moving quickly around the globe. Later, the black swan event that I have predicted numerous times at conferences and schools was confirmed by a high-level government official at a chance meeting in a major airport. This individual, who travels globally and has attended some of my conferences over the decades, indicated that within two weeks America would shut down and my travels would stop. How prophetic and interconnected this individual was! Now, nearly two years later, the challenge is not over. Let's step back and reflect on some of the changes that have impacted the agriculture industry and our lives and discuss some of the wisdom learned. 

Double barrel approach 

When it appeared that the economy in the U.S. and abroad was in the process of collapse, a double-barreled approach of circumventing the collapse was used. This strategy included stimulus from governments around the globe and accommodative action by central banks. A normal proactive action to prevent an economy from possible recession is lowering interest rates and providing support to increase the velocity of money supply. These actions were quickly introduced along with government support through stimulus checks for both businesses and individuals. According to The Economist magazine, these government checks amounted to nearly 14% of the $85 trillion global economy. However, the shutdown created by the COVID-19 pandemic resulted in record savings rates with nearly $2.5 trillion of savings on a $21 trillion U.S. economy. Savings rates were also strong in most rich nations around the world. 

Government payment accelerator 

The stimulus checks received by the agriculture industry in 2020, and 2021 to some extent, were the icing on the cake for net farm income. Analysis of the University of Minnesota’s Center for Farm Financial Management Database provides data to substantiate the claims. The database includes 3,500 farms and ranches over 20 states segmented by enterprise. In the database, 62% of net farm income in 2020 was a result of government stimulus checks. The amount was higher on dairy farms at 72%. Government checks amounted to 127% and 108% of net farm income for hog and beef farms in the database, respectively. An observation of this database over the years finds that since 2015, government payments averaged over 60% of net farm income. This is significantly higher than the less than 20% rates recorded during the great commodity super cycle from 2006-2014. These positive incomes were capitalized into rents, land purchases and other capital assets. In 2022 and beyond, what will be the strategy for life with reduced government payments or government checks for green payments? Careful analysis must be made of how profits were generated, whether the income was recurring or nonrecurring, and how the plush bottom-line profits were distributed. 

Land values accelerated in the pandemic 

The stability of farm and ranch land values is the rock behind the strength of the financial sector of agriculture. Land represents over 80% of the total farm balance sheet nationwide. Farm and ranch land values declined from 2015 to 2020 post-commodity super cycle in the upper Midwest but remained strong along the coast and in the southern part of the United States. Farm and ranch land shot up like a rocket in 2020 and 2021 in the upper Midwest while land values rose more slowly in the coastal and southern states. Again, government stimulus checks, high commodity prices, pre-inflation fueled by the possibility of green payments, and the rural renaissance where people are moving from urban areas to rural areas have contributed to the quadruple compounding effect for aggressive investment in farmland. Couple this with baby boomer farmers and ranchers at the apex of equity on the balance sheet, and land provides a strong foundation for financial resilience. The strength of land values will be very important for business decision making, as well as for lenders to create liquidity through debt restructuring to bridge the profitability and cash flow issues that may occur in the future.  

Convergence of events 

As an economist, I examine trends for interconnectedness. For example, the great commodity super cycle has only been replicated three other times since 1910, each a result of a convergence of factors. Ethanol demand, compounded by the economic growth of emerging nations fueled by China's infrastructure building, and low interest rates drove agriculture profits from 2006-2014 to record levels. 

On the challenging side, the current inflationary environment is nearly a year in duration so far and is a result of a convergence of events that could disrupt net farm incomes over the next two years. The record government stimulus and accommodative actions by central banks let the “inflation genie” out of the bottle. Layer on supply chain disruptions and just-in-time management gone awry, labor shortages and challenges of moving from fossil fuels to green energy, and a volatile economic cocktail has been served. The agriculture industry is facing the brunt of this convergence. Fertilizer and chemical prices have tripled in some areas of the country. The U.S. depends on China and Russia for up to 30% to 50% of the supply of these inputs, so shortage of these key components of production sets the stage for a possible Phase I downturn in 2022 and 2023. If the agriculture industry experiences widespread margin compression or negative margins, land values may stabilize or slightly decline in some areas of the country. The key to weathering the Phase I downturn will be the government’s willingness to supplement net farm incomes, gaining access to refinancing for liquidity, and producers with a high business and financial IQ. 

If these remedies fail to materialize, then a Phase 2 downturn could be on the horizon. This would be characterized by deep margin compression for an extended period of time and regulators and some lenders tightening credit standards. We could also experience a collapse of the international trade market or some segments of the agriculture industry. In this case, history tells us that machinery and livestock often will lose 50% of their value and land values in certain regions could decline anywhere from 20% to 40%. 

The duration of elevated inflation, possible interest rate increases, disruptions in supply and marketing chains, and the amount of government support and trade negotiations will be a high priority on the watchlist moving forward over the next two or more years. 

Agriculture transition on steroids 

Whether it is farms and ranches, agribusinesses, agricultural lenders or even academics, the institutional memory built up over the decades is quickly disappearing. While this can be perceived as a negative factor, the silver lining is that the younger generation brings a new mindset that tends to take advantage of technology, anticipate changes in the consumer marketplace and align to the marketplace.  

As a part of transitions within the industry, the use of “gig” income both inside and outside of agriculture is becoming more commonplace. Individuals operating businesses anytime and anywhere are bringing new energy to the agriculture industry. The pandemic has accelerated transitions across the agriculture industry. Collaboration and interdependence are keywords for success that the pandemic forces have actually created. 

Other observations 

The last two years of the pandemic have accelerated some trends. For example, I have presented over 250 webinars to groups all over the globe. This has created new venues for engagement and interaction with decision-makers and thought leaders where trends are often identified and verified. My interaction with European groups finds that there is a mandate to reduce fertilizer and chemical usage by 40% and 50%, respectively, by the end of the 2030s. Will this inhibit European farmers' ability to export agriculture production? If so, this may lead to expanded access to global markets for U.S. producers. A poll of these groups, particularly those in northern Europe, finds that 60% are optimistic about the future of agriculture. Consumer trends and current inflated costs are major concerns. Surprisingly, 40% of the producers surveyed developed and followed a business plan. This is generally higher than most of the progressive minded agriculture producers in the U.S. that we have surveyed over the years. They found that following a business plan provided focus, increased their ability to adapt during the pandemic, and also gave them peace of mind. 

Cryptocurrencies are now showing up on U.S. farm and ranch balance sheets as more producers are investing in this nontraditional investment. An agricultural lender inquired, “How do I value cryptocurrencies on the balance sheet?” Until cryptocurrencies become a regulated asset, valuation must be extremely conservative. Some of the windfall gains in cryptocurrencies are reminiscent of putting money on the table in Las Vegas. 


As a veteran of many economic cycles, there are quotes and wisdom that stand the test of time when change accelerates due to a black swan event or other unusual event. Here are some of the highlights over the past two years to ponder. 

  • A producer indicated that he left $500,000 of profit on the table in 2021 by following a marketing and risk management plan. On the positive side, he was profitable 10 out of 12 years following the plan. This allowed him to purchase land in every year except one!
  • A message to producers and lenders: Credit issues and business problems start at the top of the economic cycle. Business development and astute business practices start at the bottom of the cycle. Start by focusing on the basics.
  • Coach Bill Parcells, Super Bowl champion coach, in a discussion with one of his future star running backs explained, “As a coach I want you to be more successful than you do as a player. Remember, improvement starts inward out, not outward in.”
  • Good economic times are never as great as touted and bad economic times are rarely as tough as you think they are going to be. Manage and focus on the controllable variables and manage around the uncontrollables.

Success in agricultural is part art and part science. The science is about the numbers and being a student of the markets. The art is being a student of human behavior. Put them together and create a recipe for success. Remember, everyone has a life story. Listen and create your own story!!

Dr. Kohl is Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship in the Department of Agricultural and Applied Economics at Virginia Polytechnic Institute and State University. Dr. Kohl has traveled over 8 million miles throughout his professional career and has conducted more than 6,000 workshops and seminars for agricultural groups such as bankers, Farm Credit, FSA and regulators, as well as producer and agribusiness groups. He has published four books and over 1,300 articles on financial and business-related topics in journals, extension and other popular publications.

© Northwest Farm Credit Services 2021