Kohl: Farmers should brace for ‘perfect storm’


David Kohl told Marion County farmers last winter that barring weather-related disasters, farmers in this region might have a production and profit year unrivaled in recent years. But he also warned of a flip side to record profits.

Farmers, hang on to your hats.

You may only have to ponder for a moment on the general economic situation of recent months to realize that ?the perfect storm for agriculture? may be brewing.

That?s the concern predicted by David M. Kohl, professor of agricultural finance and small business management at Virginia Tech.

Kohl warned of the possibility of such a situation last winter when he conducted a semi?nar for agricultural producers in Hillsboro under the sponsorship of Emprise Bank.

He said then that barring weather-related disasters, farmers in this region might have a production and profit year unrivaled in recent years.

But he also warned of a flip side to record profits. Kohl told Marion County farmers even before the wheat began to green up in the spring, to hang onto as much of the money they would make, to stay as liquid as possible, because the economy was headed for a rough time.

Local farmers did experience much of what he foretold, although by fall declining grain prices and high input costs were eating into profits.

Kohl said then that values in urban real estate were over-inflated, and that banks involved in questionable and overextended lending were going to be in trouble. He predicted that 25 percent of businesses filing bankruptcy would have just come through their most profitable year.

?Greed, speculation and easy credit are a recipe for financial turmoil,? he said.

If the daily news plus the success of Kohl?s prophecies leave you with some uncertainty, you may want to consider the insights and recommendations Kohl now has for surviving the storm in coming years.

Kohl said the world marketplace may be entering what he called last winter a ?code red? situation. This would include eventual rapid appreciation of the dollar, North American and global recession, a liquidity lag and flight to liquidity, 200 to 300 basis point increase in interest rates, and protectionism mandates for reduction of energy and agricultural supports.

Farmers in this region, Kohl said, should consider that, nationwide, land represents 87 percent of the assets on farm balance sheets. At the same time, the country has farm debt at a historically high level with land representing 53 percent of that debt.

To add to the volatility of the farm land situation, Kohl said non-farm income and wealth have moved from capitalizing 21 percent of this land in the 1970s and 1980s to 38 percent now.

This is much more critical in some areas of the nation, Kohl said, with stories coming out of northwest Iowa of farm ground at $10,000 an acre and cash rent of $1,000 an acre.

At this time, Kohl said, the economy is entering a time when land prices and leases may drop 10 to 40 percent.

Kohl said, ?Should government lower tariffs or subsidies on alternative energy or any sector in agriculture, the results could be detrimental. There may be a backlash from the Ameri?can public toward agriculture as the general economy slumps and agriculture is perceived to be rich in profits.

?Some production and agribusiness models have been built upon long-term continued government support. The impact will be felt first in cash flow and earnings, and secondly in land and other asset values.?

Kohl said if emerging economies such as those in China, India and Russia fail to continue growing at rates of more than 5 percent annually, ?expect cash flows and agricultural land values to devalue or decline dramatically in their rate of appreciation.?

Agricultural lenders are realizing these things, and Kohl predicted they will become more conservative and begin trimming their portfolios of more marginal loan customers.

There may be no more land purchased with little or no down payment, generous appraisals, loans based upon appraisal values when appraisal values exceed cost, and limited-to-no personal liability, he said.

?If it grows too fast, it?s a weed,? Kohl said. ?Liquidity dries up fast in a panic. This is why examining working capital positions compared to revenue or expenses is critical. Earnings and cash flow, not collateral or the sale of assets, pay back loans.?

According to Kohl, in 2009 and beyond, input costs and prices will be squeezed, creating margin compression.

?Farmers and ranchers who will be vulnerable will be the millionaires on paper who have not earned a dollar,? he said. ?Next, customers that consistently have carryover debt that needs to be refinanced could be vulnerable.?

Also low credit scores below 650 will be closely examined.

?Build-up of accounts payable and unfavorable trends in profits or cash flow will be a recipe for higher rates and tighter credit,? Kohl said.

Kohl advised farm families to work with lenders or farm management programs available through such institutions such as Kansas State University to make a three to five-year trend analysis of the farm business.

?Is your net worth increasing or decreasing,? Kohl said, ?and at what rate? While examining your net worth, are the gains through appreciation of assets or earned net worth? A lender would prefer the gain in profits rather than a flick of the pen.?

Having a sound risk-management plan, including due diligence on contracts, marketing agreements and insurances, may have much to do with your survival during rough times to come, Kohl said.

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