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Managing the business through the cycles in agriculture

Sherry Bunting Published on 09 April 2015
Dr. David Kohl

The livestock sector will see increased profitability this year, according to Dr. David Kohl, Virginia Tech ag economics professor emeritus. He cited low cattle numbers and solid demand for beef, and he noted the prior movement of land “resources out of cattle and into grain sales when that market was high. Only some of those folks will return.”

Kohl talked about the seismic shifts in the global and farming economies at an agriculture lender seminar in Pennsylvania recently. As a professor well versed in financial management – and from his experience as a partner in a farming enterprise in Virginia – Kohl offered these golden rules of farm management:

  1. Know your cost of production by enterprise.
  2. Get better (more efficient) before getting bigger.
  3. Focus on the “3-P’s” – people, profit, planning.
  4. Keep one year of debt payments or two months of average expenses in cash.
  5. Modest withdrawals and living costs are your competitive edge.
  6. Watch your burn rate on working capital. (Working capital should be 33 percent of expenses.)
  7. Have good communications with your lender.
  8. Use advisory teams in your business planning.
  9. Set business, family and personal goals.
  10. Measurements are important, but pick a brief dashboard of data that you will use in decision-making.

On livestock economics, Kohl said, “Keep your eye on oil and interest rates, which will dictate what happens here.”

He noted that many countries are in or near a recession. Countries that had been growing at a rate of 11 or 12 percent are now at 5 or 6 percent. Japan, Brazil and Europe are examples of “code-red” in terms of their trade ranking. China has hit the caution yellow light. Russia is not importing at all from the U.S. or Europe.

Meanwhile, the U.S. economy has a green light. As the U.S. dollar strengthens, this has a big effect on exports and imports. For example, in China, “they can buy two Big Macs at McDonalds for every one we can buy here,” said Kohl, adding that China exists in a split economy where “800 million people live on $2 per day and 600 million live more like us.”

In concern over social unrest and the ability to overcome water and soil contamination to produce enough food for its people, China has been buying strategic assets for food production in Canada, Australia, New Zealand and the U.S.

“What’s happening around the globe impacts you,” said Kohl.

He talked about the past few years in grain markets, noting the replay now happening in cattle markets. When commodity prices are high, the money looks easy to make. “But the top managers will still earn profits at lower prices,” he said.

With grain and cattle markets occurring in cycles, Kohl urged farmers and ranchers to be aware of the levels of credit issues they face during a down cycle. He said a one-year cycle affects the farm’s repayment ability; two- to three-year cycles dip into the liquidity of the farm business; and three- to five-year cycles dip into the equity.

“You have to know how far you can go before you are at risk to lose the farm,” he said.

While the currently declining oil price benefits consumers, Kohl noted that $8 out of every $10 spent or received in the farm business are connected to oil. If crude goes to $30 or $40 per barrel, “that is scary,” he said, concerned that a too-low oil price will create the conditions for deflation and economic collapse.

Many farm commodity prices are tied to the oil price movements. He observed that in 1998, crude oil was $8.74 per barrel. As recently as a year ago it was $100 per barrel.

The Federal Reserve policy on interest rates “also affects about 40 percent of the corn price,” said Kohl. “The U.S. is starting to pull off the gas while China and Japan are pushing on the gas. Their currency is weaker and ours is getting stronger.”

The grain industry income has fallen from its biofuels high, even though 38 percent of the current corn crop still goes to ethanol production. “To have an economically viable grain industry in this country, we need to have an economically viable livestock industry,” he said. “That is very important.”  end mark

PHOTO
Dr. David Kohl speaking. Photo by Sherry Bunting.

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