A few weeks ago, the Ag Expo planning committee invited Dr. David Kohl, professor emeritus at Virginia Tech, to speak on the state of agriculture profitability as a new era of prosperity or a temporary opportunity.
He shared an interesting outlook that deserves revisiting.
No one can forget the five-year super-cycle from 2008-2013. Dr. Kohl called it the old era of prosperity because high revenues were driven by growing world economies.
The purchasing power of the seven fastest growing economies increased world demand for food, fiber, and fuel.
Our weak dollar during that period made agricultural exports very competitive in a time when these developing countries were adopting our exported meat into their diet.
The years between 2014-2019 were not as profitable. High yields were the only silver lining in the midwest as prices were significantly lower. Trade policy discussion in January 2020 propped the ag markets until COVID-19 took the world by surprise.
High yields, increasing prices, and government stimulus allowed 2020 to finish profitable. An estimated 40% of net farm income was derived from economic stimulus.
Dr. Kohl calls this current period the Government and Central Bank supercycle. He described how the following events meshed resulting in the increased price levels not seen in years. China is stockpiling grain again, subsequently increasing prices as stocks drain down.
The pandemic, which caused 12 months of supply and marketing disruptions, both positively and negatively affected markets. Domestic and international transportation have been greatly affected by the availability of drivers and the supply disruptions described above.
Weather in South America and Eastern Europe have both negatively affected production forecasts, decreasing supply prospects in an increasing demand cycle, resulting in higher prices. Global stimulus funds came as a result of worldwide disruption to employment and commerce caused by COVID-19.
Around the world, governments are injecting capital into their economies to retain business and spur spending. Stimulus is expected to be 14% of world GDP for the fiscal year.
The grain industry is currently experiencing income not seen since the 2008-2013 supercycle, but a large portion is based on this non-reoccurring income. Dr. Kohl stressed that spending non-reoccurring income wisely is critical.
For advice regarding short to long-term management, he started with the stimulus money. These funds are pure profit, allowing farmers to increase working capital, pay down debt, or invest in products that increase operations efficiency.
He acknowledged some will use the stimulus for expansion, but he reminded listeners to include a plan on how associated debt service would be managed.
While interest rates are expected to remain flat, price inflation is anticipated with the influx of cash in the economy. He anticipates carbon payments, payments made to farms for retaining carbon in the soil, will become more common during the next few years as greater attention is placed on global warming.
The carbon exchange has been active for several years but credit values have been insignificant. Dr.Kohl anticipates this will change if agriculture takes care to position our value as part of the solution, not the problem.
In the short run, grain is in a solid position. China is in the process of repopulating its hog inventory following a tough battle with African Swine Fever, and at the same time, stockpiling grain inventory again after slowing imports during the multi-year trade dispute.
The value of the dollar is always important as weaker currency provides an opportunity for larger export volume.
Ethanol demand and consumption certainly have a key role in corn usage. The policy of blend mandates, refiner waivers, and post-pandemic consumption will all be important factors in ethanol profit and subsequent corn demand.
As always, weather in the northern and southern hemispheres have a major influence on supply, and U.S. shifts in planting intentions will have a role in prices during the short term.
Longterm, Dr. Kohl expects carbon credits to become a rewarding opportunity. Policy and consumer trends will require us to adopt a level of transparency in production.
Ethanol demand, based on policy, oil, and continued adoption of electric transportation, will have a direct effect on corn usage in that segment. We will see a streamlining of supply and marketing chains, which, as we saw in 2020, is full of weak links.
Global competition will continue, especially due to infrastructure investment in the grain production region of South America.
Clint Hardy is the agricultural extension agent for the Daviess County Extension Office. He can be reached at 270-685-8480.