Ag economy runs counter to urban economy

Dr. Kohl connects dots, prepares farmers for economic reset

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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.

Leaving boots in the mud to seek new ground on Tuesday

 

Editorial Comments by Sherry Bunting, Farmshine, Friday, Nov. 4, 2016

flag19Agriculture is at a crossroads, and so is America. But the choice of paths that lie before us are neither clear nor direct.

When we go to the polls on Tuesday, it will be with mixed thoughts and emotions.

As the mainstream media analyze and over analyze every breaking news story, every “narrative,” every campaign “spin,” every poll, every issue that they deem important, there is much that gets left on the cutting room floor — important issues that no one really talks about, and yet they are harbingers of our future.

What they don’t talk about – of course – is agriculture. What they don’t talk about is the backbone of our economy, the original resource from which all other facets of the economy are made possible.

Take, for example, Hillary Clinton’s speech to financial institutions, where she said she dreams of one world, one economy, without borders. When pressed on that issue, her response was to say that, ‘Oh, that speech! I was talking about the energy economy, a worldwide energy grid. I want the U.S. to be the renewable energy super-power of the world.’

A convenient response to a concept that should give us all pause — in and outside of agriculture.

In talking with farm folk who volunteer for missions or projects in third-world countries where helping to establish indigenous agriculture practices and infrastructure is deemed so important, it hit me: We will be that third-world country — maybe not in my lifetime – but nevertheless that is one path on this crossroads if we do not take care to protect our farms and our farmers. Not only is their stewardship of the land vital to regional food security, but they are the place-holders for the essence of our liberty as a nation. Private property rights and ownership are the keys to our freedom as a nation, as a people.

Globalization is happening at a rapid pace. Running parallel to globalization is market concentration as mergers and acquisitions put more and more power into the hands of the few when it comes to food and agriculture. And then those ‘too big to fail’ entities are being sold off to foreign nations, like China, who already owns, according to the Department of the Treasury, $1.24 trillion in bills, notes and bonds (about 30%) of the over $4 trillion in Treasury bills, notes and bonds held by foreign countries.

That, my friends, is the auctioneer’s gavel on our national debt. True to form as a businessman, Donald Trump is talking about the national debt. Hillary Clinton is not.

Exports are said to be necessary for all agriculture commodity markets, especially dairy, and while I believe exports are important, they are not the end-all, be-all – except to the multi-national companies that view us as though they are on a satellite in space counting their dots on the globe: production units or consumption units, bars on a graph, slices on a pie-chart, numbers on a sales report, quarterly statements to shareholders.

In these third world countries I referenced earlier — where the good folk of the USA help farmers establish themselves — one of the first realizations is that when we throw cheap food at them, through exports, they have difficulty getting their own agriculture established to have the food security we Americans enjoy and truly take for granted.

Think about that for a moment. Are we not in danger, ourselves, of going down a path that could leave us food insecure?

The trade agreements that give our farmers market access to foreign markets also give our domestic market away to foreign imports. The give and the take are contrived and uneven. Winners and losers are made, created.

There is nothing fair or free about world trade because nations are losing the ability to care for and protect their own – particularly the U.S. – and we don’t even realize it. We are focused on the tantalizing allure of what we can sell … so that we are blinded to being sold-out.

The magician’s trick. Watch the elaborate thing I am doing with my left hand while I fool you with my right.

Many of these trade agreements are not free and fair trade, but rather a march forward to globalization, where the World Trade Organization and the United Nations become a higher power than our own Congress, our own President.

We saw just a tiny inkling of this, firsthand, when Congress quickly repealed the Country of Origin Labeling (COOL) last March, and when the administration lifted the ban on Brazilian beef in August, and when the first boatload of beef hit Philadelphia, via JBS, just three weeks ago, followed by a rapid downturn in cattle prices here at home.

We’ve already seen foreign interests, namely China, purchase Smithfield and Syngenta, to name a few. This week, the Dallas News reported that a team of Chinese bankers and a Chinese dairy are considering a possible takeover bid for Dean Foods, our nation’s largest milk bottler that handles 35% of the raw farm milk produced in this country.

What does this have to do with Tuesday’s presidential and congressional election? Plenty.

You won’t hear Hillary Clinton or Donald Trump talk about agriculture, specifically, but listening to their differing outlooks, overall, a few things are clear and have helped me make my choice for next Tuesday.

For me, voting for a third party candidate or writing in a name like John McCain (as previous candidate and Ohio governor John Kasich did) is not an option. Neither is it an option to write in Mickey Mouse or to leave that part of the ballot blank.

Folks, this is serious. This presidential election – for all of its circus acts – is no circus. This is our future. This is the future we are handing to our children and grandchildren. I, for one, cannot trust it to a candidate who has spent the past 30 years in the political realm as a profitable public servant, and has wasted so much of that time on her own agenda with such disregard for the rules others live by as to again be under investigation.

I will vote between the two major party candidates based on what I know about their outlook on the future along with what my gut tells me about the investigations into their pasts and what it says about what they could or would do with the power of the Presidency in the future.

Neither candidate lives like we do out here in middle and rural America. But, at least one of the two candidates lives outside of the political realm.

We are governed by career politicians embroiled in endless self-perpetuation. The more paralyzed they are in their elected offices, the more power is diverted to the longstanding and quite powerful bureaucracy whom are elected by no one.

Everyone complains about the gridlock inside the beltway, like nothing ever gets done.

Wrong.

Plenty of work is getting done in Washington D.C., it is just mainly the work of career bureaucrats that exercise more control and make us weaker, tearing at our moral fabric, eating away at the base of our economy, ripping through our roots, and chipping away at our freedoms.

There is a power- and land-grab underway in this country. Most all agriculture commodities are at prolonged below-breakeven prices while the political elite is poised to push yet another trade agreement, the Trans Pacific Partnership, into the mix.

Meanwhile, we have a hammer of political correctness keeping us in our place, not daring to be free thinkers. Many voices are silenced as the economic and moral decay are inextricably linked.

Take, for example, the way we accept how the government imposes ridiculous rules on what our children can eat for lunch at school. All things are connected so that local communities cannot even feed their children the way they see fit. Those rules, incidentally, create winners and losers. And in so doing, the voices of the affected are silenced.

We have a runaway EPA with the implementation and flawed interpretation of the Waters of the United States (WOTUS) legislation that threatens to create a second wave of land-grab after the market pushes a first wave of farmers off the land.

And then there is the Humane Society of the U.S. (HSUS) and their silver-tongued Wayne Pacelle. He is campaigning for Hillary Clinton. Her animal rights agenda dovetails with the candidate and Democratic Party’s obsession with climate change — right down to the livestock and dairy cattle on our farms.

There is so much more I could say, but to summarize, consider this: Who better to tackle over-regulation, unfair trade agreements, national food security, a vital agriculture, family farms and small businesses besieged by a labyrinth of complexities foisted upon them by a government run by self-perpetuating career politicians and ever-present, accountable-to-no-one bureacrats than a business man — a man that for all of his faults, at least does not live and has not spent 30-plus years operating in the self-perpetuation of the D.C. beltway.

We need to break free of the career politician mentality and breathe fresh air and common sense into the mix as well as to toss a bit of our sensitivity and political correctness to the side to break the cycle we are in and alter the path down which we are being led.

For all of his faults, Donald Trump is the only one of the two less than optimal choices we have in this election that fits that description.

Even on immigration reform, he is the one to have the best chance of getting it done. Only after our border is secured will our divided nation have a chance to come together with compassion for the illegal workers who are here today, working hard, making a contribution and raising their families that were born here. I have listened to Trump on this issue, and I get it. He is leaving room for that conversation after the border is secured and the estimated two million illegal immigrants that have committed crimes are properly dealt with. He will consult the American people on the next move after that first important move.

Election after election, candidates promise to shake things up, bring about change, bring people together, work for the people, protect our country.

Meanwhile, the beltway fills with sludge and slow-motion sets in to the point where boots are stuck.

Instead of standing fast, I’m leaving the boots in the mud, these bare feet are seeking new ground next Tuesday.