Farmers urged to maintain cash reserves for the future

KohlEmpriseDCP_4417.jpg
KohlEmpriseDCP_4417.jpg

David Kohl (seated) responds to questions from seminar participants during a break. The economict from Virgina Tech described several ?megatrends? in agriculture.

David Kohl, agricultural economist from Virginia Tech, advised about 110 farm producers and businessmen Feb. 26 at Hillsboro Mennonite Brethern Church to keep their cash reserves up and stay flexible in the coming economic world.

Kohl, who holds his graduate degrees from Cornell, was sponsored by Emprise Bank to give the fourth talk he has given in Hillsboro over the years on how to survive in the world economy.

His three-hour presentation, including a question-and-answer session, was called ?Megatrends of Ag in an Age of Turbulence.?

Kohl is a businessman as well as an academic with partnership in a vertically integrated dairy in upstate New York where he grew up. He said he and his partners took two ?small dairy herds? of about 100 cows from losing about $40,000 a month four years ago to profiting at six figures a year now.

They did it, in part, he said, by listening to consumers to establish an old-fashioned bottled milk sales route and selling 28 flavors of ice cream.

This doesn?t stray away from the facts, though, that Kohl is sought for his expertise on agricultural finance and the world economy, delivering 5,000 seminars, and traveling 6 million miles throughout the world in 25 years.

He said that seeing far-off countries such as Vietnam, Africa or South America, impresses a person with the scale and economics of the world far more than just seeing it in the news. He recommends that young people going back to the family farm for a career spend a minimum three years away besides school, working in the real world, including a year outside the United States.

Coming economy

When will coming economic conditions give farmers a green light to proceed with new expansions, a yellow to slow down, or a red to stop? Kohl outlined his advice for those green, yellow and red scenarios. Kohl said there is an 80 percent chance a code green will continue for the next 12 to 18 months.

A code green is characterized by a low value of the dollar that encourages exports. It also includes low to modest interest rates, low to modest inflation of land, strong emerging economies worldwide, a modestly strong economy in North America, and government support of agricultural energy, food and fuel.

Kohl said the impacts of the green light scenario include strong earning potential in most ag sectors, appreciation of land and other farm assets, 10 to 20 percent growth in farm debt annually, an influx of youth, non-traditional producers and non-traditional lenders into agriculture and a fragmentation of the food chain.

Kohl said he the cautionary yellow light period will begin in one to five years with a 50 percent chance of going to 2013.

He said the period will be characterized by the increasing value of the dollar, increasing interest rates (or basis points, one one-hundreth of a percentage point), stagnant North American and emerging economies, a reduction of energy and agricultural supports and some protectionism.

Kohl said the situation will also include stage one liquidity where commodity prices reduce faster than inputs. He said farm businesses should be doing the same thing as big oil in getting ready for this situation now: build a 25 to 30 percent cash basis on the balance sheets while reducing debt.

Kohl said the impacts of code yellow will include stagnant cash rents and land values with slight declines after 12 to 24 months, an 18 to 24-month liquidity lag, a debt restructure with paper millionaires who have no money, an earned net worth and cash flow emphasis in lending and the demarketing selling of farm assets.

After the code yellow, Kohl said there is a 20 to 25 percent probability that it will be followed by a code red ?that turns agriculture upside down.?

?You can see an economic example of it in the next 12 months that will be happening to the housing industry on the coasts,? Kohl said. ?People with money will be hanging onto it.?

Kohl said a code red will be characterized by a rapid appreciation of the dollar, higher 200 to 300 basis point interest increases, North American and global recession, liquidty lag stage two with a flight to liquidity and protectionism mandates with a reduction of energy and agricultural supports.

He said impacts of code red will include land values and cash rent decline of 10 to 40 percent in many areas, farm sales and liquidation crunches where opportunists buy, a rapid transition in agriculture and agrilending, a three to five-year adjustment period and banks and lenders consolidating debts.

For all small farmers, which Kohl said probably means every producer in Marion County, he warned, ?Better is better before bigger is better. Get efficient before getting bigger.?

This means follow the five critical elements for small farms, Kohl said. These include expenses such as depreciation and interest paid below 70 percent of revenue, pecent equity above 60 percent, low maintenance family living expense under $40,000 or with off-farm income to compensate, synergy and balance among business, family and personal goals and a focus or diversification strategy depending on skill set.

 

Editor?s note: A second article on David Kohl?s presentation will appear in next week?s issue.

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