Last week we kicked off the 2011-2012 Farmers & Ranchers College series with Dr. David Kohl from Virginia Tech with “Global Economic Impacts on the Farm & Ranch”. Over 150 participants heard Kohl describe how events across the world affect our farms and ranches more than ever. He emphasized that words to remember are “interconnectedness of events”. What happens in the BRICS (Brazil, Russia, India, China, South Africa) will ultimately affect U.S. farm and ranch profitability, as these countries continue to demand more food, fiber and fuel. As these countries gain momentum in global competiveness, Kohl stated, “The long term viability of these nations will be defined by the way they handle adversity.” A defining moment in each country will either make or break them, such as a change in leadership, social unrest, etc.
As an economist, Kohl provided lots of key numbers to watch for, but reminded us that usually a grain and row crop “super cycle” lasts for only 2-3 years, but we are in an 8 year super cycle, so what does that mean? No one can know for sure. One thing for producers to note is that unlike the 1980’s when the debt to income ratio was 14:1, the 2011 projected debt to income ratio is 2.35:1, meaning agriculture is not in a credit bubble, but rather in an asset bubble.
When deciding whether to acquire land or expand one’s operation, Kohl has a simple checklist to consider:
- Have you been profitable in the last three years?
- Will the land/expansion results in greater than 50% equity?
- Do you have working capital to revenue of 33% or more after expansion?
- Will overall profitability after expansion exceed interest rates?
- Will overall profitability after expansion result in return exceeding inflation?
- Will overall profitability after expansion result in return exceeding w.c.c.?
Obviously if the answer to most of these questions is “no”, then you probably shouldn’t consider acquiring more land or expanding.
In order to position oneself for the wild world of global economics, you must have a strategic plan and consider different scenarios and consequences of each. Meet with your lender who understands agriculture and your industry and will ask you those, “what if” questions. Set benchmarks for your business and see how they compare. Two things Kohl has mentioned time and time again continue to be interdependent rather than independent. It takes a team or group for you to succeed, so align yourself with those who will challenge you and make you a better business person.
Kohl also stresses the importance of being a lifelong learner. Those in attendance, Kohl credited for continually seeking knowledge and ways to improve them. Lifelong learning is what Extension provides. Kohl reminded participants that the premise of the cooperative extension system is teaching people how to improve their lives, businesses, etc. UNL Extension’s mission is “we teach”. Even though it is tempting to be in the field or find other things to do instead of attending educational programs, producers must find time to increase their knowledge of their business. Whether it is attending educational programs provided by extension, reading research-based articles, completing continuing education classes, etc., those who continue their education and implement changes will likely be more successful than those who remain stagnate. “If you’re going to lead, you’ve got to read.”
In conclusion, several philosophies Dr. Kohl provided for the second decade included:
- It is the good years that present the difficult times
- If things grow too fast, then it is a weed
- The best crop you will grow will be the younger generation
- And think globally, but act locally – convergence & interconnections.
Dr. David Kohl has a column with the Corn and Soybean Digest which you can read for more information.