by Mark Parker
Heading into a Kansas growing season, farmers know that fair weather, deluges of rain and searing drought could lie between them and harvest.
And sometimes all three.
That’s not a bad model to keep in mind for the agricultural economic outlook, according to internationally known agricultural economist David Kohl. “The economy is a lot like the weather,” the Virginia Tech professor emeritus told producers attending the recent Frontier Farm Credit Commercial Ag Symposium in Topeka. “The kind of weather you get depends on how converging events come together.”
In the coming decade, the economic climate will demand higher levels of business savvy, innovation, people skills and liquidity, Kohl believes. In particular, the economist recommended that farmers manage their operations to protect working capital with a three-pronged plan to manage revenue, cost inputs and interest rates.
“Cash, cash, cash. Cash will be king,” he asserted. “Build working capital. Don’t tie it up. Liquidity is important in dealing with challenging times as well as taking advantage of opportunities.”
Kohl cautioned against getting that all-important cash “land-locked.” Acknowledging that land can be a very good investment, he urged farmers to make sure they’re buying for the right reason—a business decision based on the operation’s goals and needs. Observing that about 40 percent of land value has nothing to do with agricultural production, he suggested that controlling land, rather than owning it, may be the best option for many producers. That means, he added, that working with landlords will become a more important part of farming operations. Solid and appropriate land purchasing opportunities will become available, he said, but producers must ensure that those acquisitions meet the requirements of their business without stressing cash reserves. For any type of expansion, Kohl counseled that farmers must exercise care.
“The number one reason businesses fail is growth,” he warned. “They outgrow their management. If it grows too fast it’s a weed so look for incremental growth.”
With the potential high for dramatic fluctuations in the agricultural economy, Kohl is urging farmers and ranchers to plan for stormy weather, sunshine and everything in between. “There will be more opportunities to succeed and more opportunities to fail,” Kohl predicted. Besides recommending that producers develop business plans for multiple scenarios, he urged them to identify the factors that could put their businesses at risk. Approximately 80 percent of all farm input costs are directly related to oil prices, for example, and Kohl noted that oil price volatility is not going away, considering that major production takes place in militarily and politically sensitive areas.
Additionally, interest rate changes could be a significant risk, he said, pointing out that even a one percent rate change can have a major impact in an era of smaller margins.
Kohl also asserted there is an increasingly important human side of farm business management. People skills, he said, will be critical to success as farmers and ranchers operate in an expanding network of interdependency. Farmers will increasingly reach out to partner with resources off the farm in order to take advantage of specialized expertise.
Using the value-added dairy business he’s involved with back home in Virginia as an example, Kohl stressed that even experienced and successful business people seek counsel and insight from experts.
“I have a Ph.D. in agricultural economics and I use a financial planner,” he said. “It’s absolutely critical to have another set of eyes look at your books.”
Farmers have a wealth of resources available to them in a wide range of business service areas and Kohl emphasized that volatile times demand that they take advantage of that expertise.
Recommending that producers “strategically think globally but act and execute locally,” Kohl noted that events well beyond U.S. borders have a significant impact on American agriculture. Pointing out that China has experienced a high economic growth rate for 20 years, he said, “That impacts you. When you put up a grain bin you’re competing with China.
When you’re in your combine, you’re competing with Russia. The world economy is interconnected.”
Domestically, Kohl expects special interest groups to have a larger and larger impact on U.S. farming. Pointing out that 80 percent of all Americans are now two generations removed from the farm, he said, “Every one of us has to be an ambassador for agriculture.”
On the home front, the economist said farm families face a balancing act. “You can’t operate a business without lifestyle connotations and you can’t have a lifestyle without business connotations,” he said, emphasizing that farm and ranch folks may need to reprioritize both personal and business decisions.
Kohl cautioned that commercial ag prosperity in the coming decade will emanate from tweaking the operation rather than from swinging for the fences. “Success in agriculture is not about doing one thing 1000 percent better, it’s about doing 1000 things one percent better,” he concluded.
In addition to Kohl’s presentation, the Commercial Ag Symposium featured sessions on a wide range of farm and ranch business topics. For more information on loans and other business services offered by Frontier Farm Credit, visit their Website at www.fron tierfarmcredit.com or stop by your area Frontier Farm Credit location in Baldwin, Emporia, Hiawatha, Manhattan, Marysville or Parsons.
