By Sherry Bunting
EAST EARL, Pa. — While he sees a storm on the horizon via high inflation, rising interest rates, global unrest, Dr. David Kohl is positive on agriculture, believing agriculture is “in position for a re-positioning” and advising farmers to “get focused in an unfocused world.”
He sees the resources provided by farms with dairy, livestock and poultry will become more critical. He sees agriculture as the next big mover, the answer — if farmers are free to be creative, manage their businesses with intensity, and drive the bus. He said transparency is becoming more important for consumers, as well as for farmers.
The Virginia Tech professor emeritus engages audiences in lively discussions of economics and financial management. He also co-owns a dairy farm and creamery in Virginia, so he sees trends on a macro and micro level. He spoke recently at the Univest Bank meeting attended by 300 farmers in southeastern Pennsylvania.
“We’re already doing a good job in agriculture. We just need to be driving the train, rather than letting it run over us. If we have a food and fertilizer shortage, the importance of a safe food and fiber source will have even greater value, and we can market that,” said Kohl.
Sizing up the uncertain times ahead, Kohl urged farmers to get focused, think creatively, be innovative, be right on top of their business numbers, plan and prioritize, set goals, and work with a team of advisors.
U.S. agriculture has strategic advantages. It’s in the lifestyle, the work ethic, the soil. Kohl noted that in China, for example, there is real concern about food in the future because 23% of China’s soils have built-up metal toxicity that is unhealthy for plants and animals.
One of the most critical advantages U.S. farmers have is “return on relationship” – or ROR.
“This is a community that gives back. Too often what we see in the world is people just taking instead of giving back. That’s your advantage. You give back,” he told farmers.
On the geopolitical front, fueled by oil, Kohl observed the U.S. has “played right into the hands of OPEC and Mr. Putin. Think about it, 21 years ago, we had 9-11. The towers went down in New York City, Somerset, Pa. and the Pentagon. We said we’re going to become energy independent in 25 years, and we did it in 10. We became the number-one energy producer in the world,” he said.
The U.S. is now divesting its fossil fuels, talking about going to ‘green energy.’
“This has created a lot of instability, and 8 out of every 10 dollars you spend on your farm is connected in some way to energy,” said Kohl, adding that consumer buying behavior is also connected to energy.
“Now it’s going to be China and India — they’re going to be getting the cheap oil while we’re paying the higher price,” he said. “You’re going to have to think innovatively about what you’re going to do with that.”
The fallout from the Russian invasion of Ukraine is something that is not going away overnight. “It’s going to require a lot of management intensity. We can make it through, but we’re going to have to step-up our game plan,” he said.
Warning of recession on the backside of inflation through “demand destruction,” Kohl said every recession – except for one – was caused by an oil market shock.
When oil prices go up, people start questioning their trips. Consumers start questioning everything they buy. They start cutting back.
“These movies play over and over again because we don’t teach history, and so we’re doomed to repeat the mistakes,” Kohl declared, drawing parallels to the 1970s, when the Soviet Union said it needed wheat.
“Communist countries create these economic bubbles because they’re authoritarian, and then, all of a sudden, those markets disappear, and the American farmer is left hurting,” said Kohl. “The market can be given and taken away, and you have to be careful.”
In the 1970s, land values were spiking, and there was political and military uncertainty. The same thing is going on today, he asserted.
“We had a very stagnant economy that was inflating, and wages weren’t keeping up with inflation. The same thing is happening now,” he said, noting inflation hit 8.5 on April 12th – the highest since 1981 when this similar pattern of events in the economy were precipitated by high energy costs and geopolitical factors and uncertainties.
What moved the U.S. forward then? The development of computer technology and the information age “brought us forward to years of wealth,” Kohl reflected.
What is going to be the ‘big mover’ this time? “Agriculture is one of the answers,” he said.
In the face of skyrocketing fertilizer price and tight availability (which he said will likely be as bad or worse next spring)… “Never has there been a time when manure was so valuable as it is today,” said Kohl, noting the “very real potential” for this to increase into the future as global impacts increase food insecurity.
“We have the solution right here,” said Kohl. “We can adjust to more manure, to poultry litter, to putting biologicals on the soil. We’re going to have to think outside the box, but we’ve got the resources right here to take care of it.”
On the labor front, Kohl noted that the current shortage of workers has every major company in the U.S. working on automation.
“Where we have people shortages now, we will have job shortages later because companies will automate,” he said.
Rising energy costs further complicate this picture as companies try to get back in the groove of work.
Supply chain disruptions will be dominant for the foreseeable future as 40% of China’s manufacturing is in cities that are locked down right now for the COVID variant, Kohl noted.
This is creating supply chain problems now, and when delayed shipments go out later, ports will be overcrowded again.
On the flip side, as China’s economy slows down because of being shut down, this also slows down oil price advances.
Regulations have also played into the issue. Kohl hears from truckers. They tell him they are retiring in droves due to so many additional regulations put on them by federal and state governments. This is leaving a shortage of truck drivers.
Everything stems back to the COVID pandemic. Prior to the pandemic, the U.S. had charted its longest monthly economic expansion in history, according to Kohl.
“Now, consumer confidence – which had been in the low-70s – is in the high-50s, showing our consumer is losing confidence, and that is what drives 70% of the U.S. economy,” said Kohl.
Another indicator Kohl looks at – and it is tied to interest rates – is the housing market. “That’s starting to crack in certain parts of the country,” he said. “We had wealth moving, cash coming out of New York and New Jersey bringing money to other parts of the country. Eventually, the shell game stops.”
Kohl also looks at the price of copper. “It’s still strong, and China is stockpiling it because they are anticipating an economic slowdown.”
So, what should farmers get ready for?
“Get ready for the economic flip,” said Kohl, “that 12- to 24-month period where your costs went up, but the costs don’t correct as fast as your price does.”
That’s what happens when inflation gives way to recession, so be aware and prepared.
Working lines of credit are getting higher right now, so when federal and state regulators all of a sudden want banks to tighten up on credit, that creates some fallout.
Whether talking about a country, a business, or a home budget, financial liquidity and the ability to generate cash is the pressure point. “Russia and China are having that problem right now,” Kohl observed.
As for Americans, “52% are living paycheck to paycheck with an average cash reserve for 13 days,” he related. “The ability to generate cash is your perseverance. Your perseverance is the thing that is going to be very very critical.”
Kohl offered business strategies to key-in on.
Position for a quick pivot to cash
“Working capital is queen on the chessboard,” said Kohl. Working capital and the ability to pivot quickly to cash and to manage debt service will be increasingly important. Cash earns flexibility.
Do cash flows and overestimate costs
Kohl said cash flows are 80% of a business plan. “You have to think about production, marketing, finance, to know your cost of production. This helps you visualize your operation,” he said, urging farmers to overestimate by a minimum of 25% in today’s inflationary time so there are better odds of good decisions. In times like this, bad decisions can be compounded.
Planning is essential
“Manage the controllables, and manage around the uncontrollables,” said Kohl. “We can’t manage what comes out of D.C., Moscow and Beijing. We can focus on the things that we can control. That’s where patience and perseverance comes in. Spend 5 to 10% of your time on planning. It’s that important.”
Just like the basketball player planning and training to spend 95% of his game time without the ball in his hands, Kohl said: “It’s the things you’re doing when the ball is NOT in your hands that help you to do something important when you get the ball.”
Work with a team of advisers.
He urged farmers to bring together a team of advisors if they don’t already do this. “Get your crop consultant, livestock consultant, lender together. Another set of ears and eyes is very important to keep you focused,” said Kohl. “Technology gets us unfocused. This is an unfocused world. Get focused in an unfocused world.”
“Write down your goals,” he added. “This leads to better mental health and improved earnings.”
Prioritize the priorities
Life on the farm and managing the farm business can feel like a constant state of competing priorities. Kohl urged farmers to practice the art of “prioritizing your priorities.”
In other words, avoid overscheduling, and strive to achieve a work/life balance. “The best crop you’ll ever raise will be your children and grandchildren, your interactions with young people,” he said.
Kohl also urged farmers to take care of themselves, to make time each day for prayer or meditation, pay attention to diet and exercise, get enough sleep, and have a support network.