Super cycle in ag sets producers up for risk

Dave Kohl, Professor Emeritus, Virginia Tech University.

A 10-year period of wealth in the U.S. ag sector, particularly in grain production, has led to a super cycle of appreciating commodity and land assets.

David Kohl, professor emeritus of agriculture and applied economics at Virginia Tech, said the cycle has produced emotions and behaviors that can either harm or help farmers and ranchers when the cycle ends.

Eighty percent of economics is based on emotions and behaviors, Kohl said. The current long-running super cycle in agriculture has fueled greed, anxiety, complacency, optimism and fragility, he said.

Greed is leading some producers to want more, he said, causing them to veer from their basic business plans, discipline, marketing and risk management.

Anxiety has become a staple to some who question when the cycle will end and when interest rates will rise. That has more and more producers doing scenario planning, bringing them back into objectivity, he said.

Others are complacent, assuming this is a new normal, a new plateau and straying away from their basic business plans.

But the cycle has also fostered optimism, bringing new energy to agriculture. The wealth cycle is attracting younger producers, more women and more minorities with a whole new way of thinking, he said.

It has offered opportunity but has also resulted in a fragile environment, in a mix of global economies, government uncertainties, regulation, rapid appreciation of assets and a fickle Mother Nature, he said.

When and how abruptly the cycle will end is unknown, but it will end. Producers should be prepared by considering the major credit risks, he said.

Producers should be doing scenario analysis to map out how they’ll operate and manage when the prosperity ebbs, he said.

Producers are also at risk from interconnection/third party affiliations, wherein one entity goes down and brings another one down with it. As agriculture concentrates, that will be one of the key issues, he said.

More aggressive producers in pursuit of more need to hold better to discipline, and all producers — particularly in the Midwest — should be prepared for a downward correction in land values. Any asset correction brings six years of turbulence, he said.

A widened gap of profitability is also in the cards. Those in a negative financial situation have been able to ride the wave of asset appreciation but will be exposed when that appreciation is corrected, he said.

Another risk will be in the concentration of debt, with 80 percent of production carrying 60 percent of the debt. That could be a critical issue, particularly with those aggressive producers, he said.

Producers will also be at risk from family living costs and outside expenditures that might have increased significantly in the super cycle. Those with a lot of cash going out the door can really start running into problems, he said.

Another area of risk is from growth missteps, wherein business acumen and management don’t keep up with the growth of the business and causes a lot of hiccups, he said.

Producers should be strategizing for both short-and long-run scenarios and follow the business plans of the top CEO producers to be prepared, he said.

Those top CEOs use a profit success formula where profit equals overhead costs, cost of production, working capital, liquidity and marketing and management.

They also use a profit plan where 60 percent of their profit is used to improve efficiencies, 30 percent is held for working capital and 10 percent is allocated to spending.

They prioritize goals and management to reduce overhead costs to stay competitive and adopt the “hear, understand, and take action plan, weeding out any mistakes.

They also utilize an advisory team, recognize that efficiencies need to come before growth and have a relationship with a lender who understands the producer’s industry and business and follows through.

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