Kohl: Watch Trade Risks

The risk of weakening agricultural trade is something that agricultural bankers and their farm clients need to watch, Dave Kohl, an agricultural economics professor emeritus from Virginia Tech told the National Agricultural Bankers Conference in Omaha, Nebraska, on Wednesday.

Kohl, a popular itinerant speaker who is anything but retired, outlined the financial risks that a weakening grain sector of the U.S. economy poses for farm lenders, but he emphasized that the farm economy as a whole remains fairly strong, and the U.S. economy is doing well. 

“I’m not predicting a major downturn,” Kohl said of agriculture at the gathering organized by the American Bankers Association. He expects diversified farms to remain healthy in the current downturn of grain prices, and livestock producers are currently thriving. Even in the grain sector, “those top-flight managers will find a way to make an adjustment,” he said.

The U.S. economy as a whole is doing well, Kohl said, basing that judgement in part on recent conversations with over-the-road truckers, one of Kohl’s informal leading indicators. But the rest of the world? Not so much.

The U.S. economy is “the best house in a bad neighborhood,” Kohl said.

The economies of developing nations such as Brazil and Argentina are struggling, and China’s growth is at half the rate it has been in recent years.

“We are going to have to keep an eye on global economies,” Kohl said.

“As you go to Europe — very important. It’s 25% of the world economy and China’s biggest customer,” Kohl said.

If China sells less to Europe, that may affect U.S. agricultural exports to China.

“Europe is going into recession,” Kohl said. As the European Central Bank tries to stimulate the European Union economies, a weakening euro will strengthen the U.S. dollar, also making U.S. exports more expensive.

Keep an eye on Ukraine and Russia, too, he said. If Russia’s president, Vladimir Putin, cuts off gas exports to the European Union, “all those railcars in North Dakota that are going for grain are going for energy,” Kohl said.

About 70% of Russia’s economy is tied to the energy sector, so Russia could be hurt by falling oil prices. 

“Oil, since 1969, has always been a leading indicator of a recession in the U.S. economy and the world,” Kohl said.

And, while Kohl expects the U.S. economy to remain strong well into 2015, he predicted tougher times elsewhere. “The bottom line: deflation and recession in Europe,” he said. 

With $3.50-per-bushel cash prices for unsold corn now filling grain bins in the Midwest, Kohl hardly needed evidence for the end of the grain boom.

“We’ve been riding high for the last 10 years on the great commodity super cycle,” Kohl said. “The commodity super cycle is over.”

There have been three others that were shorter — after World War I, at the time of World War II, and in the 1970s, Kohl said. All were shorter.