Insights for the next decade of agriculture
There is no question, 2020 has been all over the map, but with this unprecedented year coming to a close, what should agriculture be prepared for in the next decade and how will this year’s pandemic influence the next 10 years?
“We have a black swan event about every 10 years, and of course this year it was COVID-19,” said David Kohl, Ph.D. professor emeritus of agricultural finance and small business management at Virginia Tech. “Then we’ll usually get two baby black swan events in between, which could be weather events, disease events, etc.”
In 2008 and 2009, the black swan event was the financial crisis, which agriculture did not feel as much because it was going through the great commodity super-cycle. Going back to the turn of century, the black swan event was the meltdown of the high-tech market followed by 9/11.
“One of the things about black swan events is that they will accelerate change in consumers, society and business,” Kohl explained. “They’re disrupters, they will accelerate the economic and financial divide of the decade of the 2020s, but they also create opportunities so you’ve got to look at this cup half full rather than half empty.”
One topic Kohl said would have a big impact on agriculture’s economy is globalization. He said after World War II, for about six decades the United States was into globalization and we got into what he called hyper-globalization during the commodity super-cycle. However, from 2007 to 2012, the emerging nations—Brazil, India, Russia, China, South Africa, South Korea, Indonesia, Mexico and Turkey—doubled their purchasing power.
That power strengthened the demand for food, fiber and fuel, which brought on the super-cycle that caused unprecedented cash flows and then, of course, we saw increases in land values,” Kohl said. “Right around the 2008 financial crisis that all changed. We started moving to de-globalization, then it accelerated as other governments around the world decided to start producing more in their regions and countries instead of importing as much from the U.S.”
According to Kohl, $1 out of every $5 comes from global markets, so de-globalization will play a significant role throughout the 20s. This year we found our gigantic Achilles’ heel in supply in marketing chains, whether it was agriculture, technology or manufacturing. Kohl said he is starting to see more of a regional or a country concept such as made in the USA or made in China.
“Everyone wants to become more self-reliant so they don’t get boxed in, so it’s going to be a contest between concentration and diversification and again this is going to ripple back through the agricultural industry,” he said.
Kohl also expects a disjointed U.S. global recovery. He said there are certain parts of our economy operating at 50 to 75%, such as airlines, hotels, school systems, sporting events and it will probably be a while before they come back to normal. In contrast, there are other parts of our economy that are at 125%, such as Amazon.
“This disjointed recovery is going to create volatility, and they key is going to be able to manage it,” Kohl said.
Trade, China and government support
Trade agreement uncertainty could also cause big shifts in the next decade’s economy. Kohl expects to see some tension and stress in trade agreements with rich nations.
“The other thing to watch is China has invested $1 trillion in 68 countries around the world and this is part of China’s strategy to become a world and military-dominant country by the year 2040,” Kohl said. “Don’t bet the farm on a trade deal with China because it can be given and taken away.”
In addition, China will try to continue growing their market share around the world.
“In 1990, China was 2% of the world’s GDP, today it’s 16%,” he said. “They initially gained global market share in Japan and Western Europe, next they’re going to go after market shares in the U.S.”
To achieve this the Chinese unveiled a plan called a dual circulation strategy. Globalization centered around the U.S. for about five or six decades and now China wants it to center around them and their regionalized strategy.
“They want to be the dominant power in the Asian region, which is 30% of the world buying power and potentially 50% by 2040,” he said. “The next part of their strategy is the Chinese want to move toward the U.S. economy. In the U.S., 70% of our $21 trillion economy is driven by the service-based economy. In China it’s about $4.5 trillion on a $15 trillion economy. They want to move that toward 50% in the next few years, so a lot of the strategies and negotiations will center on this approach.”
Kohl said the ratification of the Regional Comprehensive Economic Partnership that is comprised of 15 Asian nations, including China, is also a concern.
“This represented 2.7 billion people in the world, $25.8 trillion on $80 trillion global economy,” he said. “But here’s the big one, $2.5 trillion in global trade values. Contrast that to the United States-Mexico-Canada Agreement, which was ratified this year is about $25 trillion, but $7.8 trillion in global trade value. What we need to really watch with the new administration coming in is whether they join the Transpacific Trade Agreement as a blocking strategy. These trade deals are going to be critical and agriculture is going to be right out front and our industry will feel it first.”
Kohl’s next bullet point is central bank and government’s support of agriculture.
“Government support of agriculture is $2 billion a day globally, and in the United States it’s somewhere between $36 and $50 billion depending on the way the rest of the year plays out,” he said. “The big question for 2021 and beyond is are we going to continue these supports, particularly for the next stimulus bills and how are other segments of the economy and society going to get their share versus agriculture. It is going to get very competitive. My point here is as farmers and ranchers, we’ve got to think about life after government support and with government support throughout the world comes government encroachment, higher taxes, more regulation. This is the 800-pound gorilla in the room.”
The run-up of commodity prices like corn and soybeans while China is rebuilding its hog sector has also shaken commodity markets. China is stockpiling commodities and the run-up of corn, soybeans and a few of the other commodities, has set marketing back five years.
“One of the things I would suggest to you as agricultural producers, follow the process,” Kohl said. “If you do that and follow your fundamentals, it’s like shooting foul shots, you’re going to make 80%.”
Agriculture not only has to watch China rebuilding its protein sector, but the economic health of trade partners. The Mexican economy is facing the brunt of COVID-19, and that could affect the U.S. negatively as well. Additionally, the value of the dollar could weaken. Some believe the dollar will hold, but others expect it will decline 10 to 15% and that will come back to impact the bottom line.
Livestock challenges
2020 has exposed a major flaw in our livestock sector, which is processing. It was too concentrated and when the plants slowed down, the producers suffered, the consumers paid more and processors still made their money. This allowed non-competitive products like non-meat and non-dairy alternatives to gain momentum. These competitors should not be taken lightly in the next decade. The aid the government provided through the pandemic may cause some major bumps down the line.
“The greatest threat to net farm income is government support, but with the tax implementations of the Paycheck Protection Program, it reduced expenses so some ag producers are going to have to pay income taxes,” Kohl said. “Along with that I am also concerned with the inflating expenses through technology and higher taxes.”
Additionally, Kohl said the boosting of minimum wage to $15 will be difficult for agriculture because it also boosts the wages all the way up on the scale and with 50% of the farms and ranches depending on off-farm revenue, we may have job loss or salary reduction.
Apart from the negatives, Kohl predicts positive trends for young farmers and ranchers. He expects an increase in local niche markets and progress with broadband internet in rural areas.
“The other big element is you’re going to see accelerated transition owners of the younger generation,” Kohl said. “Right now 21% of farms do not have a next generation, so being able to link up people who have a desire to farm and ranch with people who have no next generation, that’s going to be a great opportunity.”
Finally, Kohl believes the brunt of the U.S. recession will be felt in the urban areas and on the coast, not so much in the agricultural areas. “I think we’re going to be in and out of recession until we are sure of a corrective action with the vaccine and that is probably not going to go smoothly.”
Lacey Newlin can be reached at 620-227-1871 or [email protected].
