Kohl: The Easy Money's Been Made
We’ve all heard the long-term outlook: The world population will reach 9 billion people by 2050, and 70% more food will be needed with 70% fewer resources.
David Kohl, professor emeritus of ag economics at Virginia Tech University, says there is reason to be optimistic in production agriculture. But farmers aren’t going to find it nearly as easy to make money the next five years as they did the last 10. It is going to be a volatile time.
“In the grain sector, the easy money has been made,” Kohl told corn producers at the Wyffels Hybrids Corn Strategies Conference near Knoxville, Illinois, on July 8. “But there is opportunity for the real good managers to make money.”
The next decade, Kohl adds, will bring about tremendous volatility. “There are going to more opportunities for success – but also more opportunities to fail,” he says.
Many farmers believe that getting bigger is the best way to boost profitability in production agriculture. Kohl disagrees. “You need to get efficient before you get bigger,” he says. “Better is better before bigger is better.”
It was easy to make money the last 10 years, with high crop prices and cheap interest. But things will change in the next decade, with producers needing to focus on understanding financial statements, saving cash, and comparing how their operations stack up against the competition.
From 1995-2013, the top 20% of crop/livestock producers generated a 10% rate of return on investment in a given year, Kohl says. The bottom 20% generated 1% ROI or lower. “These farmers have used land appreciation to keep going,” he explains. “When the real estate tide goes out, we’ll find out how the good managers have been.”
Kohl says farmers should strive to keep a year’s supply of working capital in liquid form, whether it's cash, grain, or livestock. When the proverbial tide goes out, there could be opportunities left in the wake, and producers who have cash available can take advantage of those opportunities.
Producers cannot count on continued rapid appreciation of farmland values. They are being propped by low interest rates and the low value of the dollar in international trade.
When the Federal Reserve begins to increase interest rates, watch out. “When they start tightening down and increase interest rates, it will have an impact on your margin and land values. Operating costs are where you will face it first. As we see tighter margins, we’ll burn through working capital, and need operating money,” he explains. “That’s the first place your interest rates will increase.”
Three things for producers to watch:
Unemployment rate: At 6.7%, now, if it goes below 6.4% by next spring, interest rates will begin to increase, he says.
GDP growth rate: It is -2.9% now; Kohl anticipates 1% to 2% GDP. Holding back the U.S. economic growth is heavy national debt, dysfunctional national leadership, and federal stimulus.
Inflation: 2.1%, accounting for food and energy. The agriculture portion of inflation is about 4%, due to increases in cash rents, real estate taxes, and inputs cost. “When the rest of the economy was in recession, companies kept cash on the balance sheet. In the rural economy, cash has been in circulation, and the inflation rate was a lot higher.”