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Winter is coming: Agricultural economic cycle enters low slump

Progressive Dairyman Editor Karen Lee Published on 11 March 2018
Winter is coming

As the popular HBO television series Game of Thrones starts with an episode titled “Winter is Coming,” the phrase is often repeated and serves as a warning for the impending winter that threatens the seven kingdoms on the continent of Westeros.

Unlike reality, where seasons last a few months, in this fictitious land there are extremely long seasons which last at least a couple of years each.

At the 2018 Managers Academy in Orlando, Florida, David Kohl, professor emeritus in the agricultural and applied economics department at Virginia Tech University and president of AgriVisions LLC, identified a long seasonal pattern in the agricultural economy. He also warned, “Winter is coming.”

Summer: 2006-2012

The super-cycle seen in these six years has only been replicated three other times since 1910, and it was extremely long, Kohl said. This period included a strong demand of agricultural products from emerging nations aided by a low value of the dollar and low interest rates.

Technologies really started to emerge in agriculture that advanced production. In addition, there was an ethanol boom that hindered dairies with input costs but helped other segments of agriculture.

“I had a lot of people say they made more money in that five- or six-year window than they did in the previous 30 to 40 years,” Kohl said.

Fall: 2013-2017

This early stage of an economic reset had a commodity surplus with suppressed margins, profits and cash flow. “We’re burning through some of the working capital,” Kohl said.

Land values have maintained their resiliency, but he is hearing from lenders that producers have been refinancing land equity to gain liquidity. Federal regulators are starting to notice this behavior.

“You’re going to have to build a better base now; I can tell you winter is coming,” he said.

Winter: 2018-2021

As the agriculture economy heads into the winter season, there will be a widening gap of performance. “There’s going to be a group that gets it and makes adjustments in the business, and the other ones aren’t,” Kohl said.

The winter season doesn’t have to be all bad. It will be dependent on systems management, the availability of operating money and whether non-traditional vendors stay in the market to provide credit. “You will see about 40 percent [of producers] that will selectively grow their business,” he added.

As for land prices during this season, Kohl said marginal land is likely to decline in value.

Spring: 2021-2025

The first five years of the next decade will be a period of regeneration. The top 40 percent of producers will make money, while the bottom 30 percent of producers will lose money.

Family businesses will be challenged with experience, tenure and equity versus youth, management, growth and innovation. “When you mesh both of those together, you take your business to the next level,” he said. However, when you don’t, the only winners are a bunch of high-priced lawyers and Uncle Sam.

The marketplace will continue to be consumer-driven with demands for customization and experience. “If we get it, we’re fine,” Kohl said. “If not, our milk consumption and dairy consumption will continue to go down.”

These future gains are not size-specific, and both large farms and small farms can be in the position to excel.

Summary

Those are the four seasons we have or will witness in the agricultural economy. As winter is coming, the transition period will be very critical to farm success. Producers need to be prepared in multiple areas to weather the market downfall.

 “It’s going to be more than just getting milk out of cows,” Kohl said. “It’s going to be about financial, marketing, management and putting that system together.”  end mark

ILLUSTRATION: Illustration by Ray Merritt.

Karen Lee
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