Ag economy runs counter to urban economy

Dr. Kohl connects dots, prepares farmers for economic reset


By Sherry Bunting, reprinted from Farmshine, February 2, 2018

EAST EARL, Pa. – “The growth of the economy is hotter than a pepper sprout, but for how much longer?” observed Dr. David Kohl, Virginia Tech professor emeritus. He then opened eyes, and ears, saying that, “When the urban and suburban economies are going gangbusters, the ag and rural economies tend to struggle. That is very typical. The ag economy tends to run counter to the general economy.”

And with that, we were off to the races with Dr. Kohl, who spoke about positioning for success in the economic reset as the keynoter for the annual Univest Ag Summit that drew over 350 people — mainly farm families and many of them dairy producers — to Shady Maple Smorgasbord here last Friday, Jan. 26.

When Kohl is on the agenda for a meeting, you know you are in for an invigorating look at socio-economic trends, and a whole lot more. His high energy presentations deliver tidbits of insight that help make sense of market patterns that are so difficult to understand. The fact that he is a partner in a creamery is just ice cream on top of the cake.

Part of the reason for these opposite fortunes for urban vs. rural economies is the strength of the dollar and the price of oil that coincide.

Kohl is watching what happens with the U.S. dollar because this will influence inflation and interest rates in the general economy as well as exports in the ag economy.

“When the dollar is stronger, we are in a weaker position to trade commodities,” said Kohl. “When the dollar is weaker, it picks up inflation, so we have to watch out for higher interest rates. We are well into this period of low flat interest rates, but that is about to change.”

Kohl sees the Fed raising the prime rate possibly four times in the coming year, but that will depend on the rate of inflation. If it stays below 3%, there will be less incentive to raise interest rates. In fact, the report released that day pegged it at 2.6%. We shall see.

As he went through the indicators, Kohl indicated his bullishness on agriculture in the East. “One-third of the consumers with money reside within 10 hours of you,” he said.

While it is true that as the economy improves and consumers have more money in their pockets, the food processing and foodservice sector positions have improved, the problem is that the farm sector tends to ride at the back of that bus. What makes the difference for ag, according to Kohl, is the economic growth of export partners.

Trade has become integral to the marketing, pricing and distribution of farm commodities, including dairy, according to Kohl.

He travels extensively, especially during meeting season, and he said it is his ability to go out and confirm the numbers that allows him to see trends and connect dots.

Right now, he said, the problem for dairy is that we are working through a surplus. “The high prices of 2014-15 brought in some inefficiencies,” said Kohl. “When I see the bottom third of producers making good money, that’s when I know we will see financial issues within the next two years.”

On the trade issues, Kohl said that 1 out of 7 days’ worth of milk production in the U.S. is exported somewhere, and 39% of those exports are going to Mexico. During a conference in Mexico, he learned that those buyers will go elsewhere and pay more for dairy if they need to.

And while Asia, and China, are important export destinations for farm products, Kohl said that  NAFTA re-negotiations are important because the U.S. exports more ag products to Canada and Mexico, combined, than to China.

He observes that 47% of the Mexican population is under 25 years of age, and that “This youthful population of consumers helps fuel continued growth in U.S. agriculture.”

He also noted that 3 of every 7 consumers with money to buy goods reside in Asia, but the U.S. has pulled out of the Trans Pacific Partnership, “leaving China to fill our spot, so now Canada and Mexico are in the TPP and they are making agreements without us there.”

Kohl acknowledged the currency manipulations that go on by other countries, including China and Mexico, to improve their market competitiveness globally, and he said that is something to watch both in the trade negotiation processes and in terms of economic factors affecting agriculture, particularly as the U.S. dollar is likely to weaken.

Within this trade discussion, Kohl said the single most important thing that President Trump has done is appointing former Iowa Governor Terry Branstad as Ambassador to China.

And here’s the stuff you get from a guy like Kohl: Branstad and China’s leader Xi Jinping have a very close trusting relationship that dates back 35 years to their work on an Iowa hog farm. In fact, China’s leader holds a Ph.D. in ag and rural markets. He came from an elite family in China, but during the 1980s farm crisis circumstances had him working on farms in east Iowa.

UnivestMeeting(DaveKohl)2“The leader of China worked on hog farms for two years. He ‘gets’ agriculture,” said Kohl, as he turned to a table populated with blue and gold jackets and said: “The relationships you form today, you will not know their impact down the road.”

Under the Trump administration, the U.S. sealed a “beefed up” pork and protein deal with China that has been good for the livestock sector. Perhaps dairy is next?

 Kohl also watches the weather. South America is in their double crop season and it is dry there. In the U.S. southwest, it is very dry in Texas, Oklahoma and Kansas. “If this continues through April 15 or May 15 and if it goes to the upper Midwest with a dry Southeast, it will impact corn.

He also keeps a careful eye on oil and energy prices, proclaiming that the U.S. made a pact after 9/11 to become energy independent within 25 years, but has done it in 10.

“We are now the energy leader in the world, so other nations can’t control us anymore,” said Kohl. Oil and energy costs influence the general economy, and really have an impact on farms. “8 out of every 10 dollars spent on the farm business are connected to oil.”

On the flip side of the oil coin is the historical relationship between oil prices and farm commodity prices. Kohl sees oil getting cheaper. “The demand side is changing. People are moving to cities and using public transportation,” he said, adding this surprising statistic: 31% of people aged 18 to 25 do not have a driver’s license.

He also noted that in Germany, they want to outlaw the internal combustion engine by 2040! And that in China, they want to have 25% of all vehicles run by electric by 2025.

The big trends impact so many things over time, and that is why Kohl pays attention to them.

In fact, he noted that the advances in farming technology have produced surpluses by taking the lower yield farms and really improving those yields. “That is what technology does. It improves the bottom end and that creates surplus, and this is why we need export markets.”

What does all of this mean for farmers? Kohl put the “correction” or “reset” he sees coming into perspective, observing that the 1980s correction went down fast and lasted five years. “This one is a grinder,” he said. “We are not seeing a collapse in the ag economy like we did in the 1980s. We are seeing it grinding along and surviving with technology and management.”

Kohl sees the stock market rate of gains as something that can’t last forever and believes it is a “bubble.” He quickly added that many people disagree.

He noted that student debt is record high, the rate of consumer savings in the U.S. is at the lowest level since 2007 and credit card debt just exceeded a trillion dollars.

Bubble or no bubble, Kohl encouraged listeners with his belief that what we have now is an “asset bubble” where equity and resilience will be the tools to guard. “Don’t get complacent on equity,” he urged.

The economic drivers of the current cycle are its elongation into a supercycle, the available technology and management, interest rates, stronger financial underwriting, working capital, land equity cushion, and crop insurance programs.

“Currently 90% of the world economy is hot,” said Kohl, adding that, “If it grows too fast, it’s a weed.” In his opinion, it is growing too fast.

The killers to watch out for are a rise in oil prices, a decline in the stock market, a tightening of credit strategies by the Central Bank and ‘bubbles.’ The bubbles to watch are auto debt, student debt, stock market, credit card debt and farm land asset to credit.

“Economic expansions do not die, they are killed off, and those are the things that can kill them,” said Kohl.

He said workforce development will be critical for sustaining the economic engine that is revving up, and he was encouraged to hear President Trump say last week that, “Not everybody needs to go to college. There is nothing wrong with vocational skills.”

What can dairy farmers do as these macro-economic factors around them are out of their control?

“Look at your business, and drive it toward efficiencies,” said Kohl. “Do your cash flows early and often to adjust to changing tides.”

Recognizing the trend toward diversified income streams on farms in southeast Pennsylvania, Kohl said that is more sustainable in today’s environment.

But the biggest piece of advice he gave was for farmers to “be proactive. Whether large or small, the top producers are making the adjustments, the middle is in denial waiting for bad weather somewhere to bring back commodity prices and the bottom third are at the end of the pier not knowing what is wrong.”

Look for Kohl’s cornerstones for success as this continues in a future edition.