Now that we are entering the second year of the second decade of the 21st century, what does one have to keep on the radar screen concerning the business and economics of agriculture? This is an extended column discussing some of the elements that will be keys to your success, regardless of ag industry or business.
The first key out of the chute is to think globally and act locally. This is essential to managing your business by bringing the complex world of global economics to your doorstep. Various sources of information can help you accomplish this, such as seminars, online resources through your computer or iPad, or just old-fashioned reading and face-to-face interaction.
Another element will be the economic and political fortunes of the BRICS nations – Brazil, Russia, India, China and South Africa. According to theEconomist magazine, Russia and Brazil’s GDP growth will slow to the mid-3% range. Russia, of course, may have political issues with leadership, and some think Brazil may be heading toward recession.
China and India, the two most populous nations of the world economy, are experiencing slowing growth due to reduced demand for exported consumer goods. China will change political leadership in October. A new Asian trade pact between Japan, China and other Asian nations bears watching as this area of the world forms a powerful global bloc economy. South Africa, the largest economy on the African continent, along with South America and Oceania are key southern hemisphere alliances formed with Asian nations to provide food, fiber and fuel to the growing population.
As I state in my seminars, follow the 8-5-3 rule to determine the BRICS nations’ impact domestically. That is, if these nations’ combined GDP growth is 8% or more, demand for grain and row-crop production will be robust. Be aware that the input costs with oil will be high, placing a premium on margin management by producers. A decline to 5% growth rate will reduce commodity prices by 20%. If these economies’ growth rates are below 3%, denoting a recession, this could be the foreteller of a correction in commodity prices.
Domestically, expect slow to moderate growth of the U.S. economy between 1% and 2%. The headwinds of unemployment and housing, along with the political and regulatory uncertainty in a major election-year do not bode well for those industries linked or aligned with the domestic economy. A major black swan or unusual event in the form of political, economic, military or natural disaster, could lapse the U.S. economy into recession.
The European economies will continue to struggle in 2012, which may impact the strength of the dollar and demand for U.S. Treasuries. Do not be surprised if some of the European nations such as Greece and Italy have a credit crisis and are asked to leave the Euro alliance. If Europe goes into recession, this will impact China and Asian economies, which are linked to the recent success of grain and row crop agriculture in the upper Midwest.
The key for livestock will be continued demand for beef, pork, dairy and poultry, both domestically and internationally. Again, margin management should be the first priority for these industries while making every attempt to have an effective risk management program for output and input prices, which have skyrocketed in recent years.
Land values will continue to rise in areas tied to grain, row crops and rights to oil, gas, water and minerals. The key question will be how fast these farmland values and cash rents will ascend before the margin is driven from these assets. As agriculture makes the news as the shining star economically, it will draw traditional and nontraditional investors to purchase farmland.
What could cause a land value correction? A combination of global economic slowdown, increased interest rates, stronger returns from other investments such as stocks and bonds, possible trade sanctions or currency disruptions could result in a modest or moderate decline in land values.
In 2012, expect the continued acceleration and impact of the convergence of biotechnology, engineering and information technology. Those producers who have high-quality land, labor and capital resources can benefit by implementing new technology in a cost efficient manner to see profits rise. On the other hand, agriculture will be the industry of opportunity, as one size will not fit all. Local, natural and organic operations in some areas will benefit from highly skilled ag entrepreneurs who are attuned to the marketplace. Midsized farms and ranches are still viable, but will require prudent debt management and modest living withdrawals. Larger, more complex agricultural businesses will be dominant players in the marketplace. Some growing family businesses will fall into this category and be the domain for individuals who have the strong organizational and people skills of a CEO executive producer.
Keys for success in 2012
- You have to read if you are going to lead.
- Have a sound profit plan that allocates profits to the resources that provide the biggest return.
- Build a financial shock absorber of cash, liquidity and equity in case of unusual events.
- Finally, enjoy 2012 by establishing goals for business, family and personal life, with a key focus on balance.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]