Agriculture in the Age of Turbulence
Jan 22, 2008 11:37 AM
Source: Soybean Digest Magazine By Dr. Dave Kohl
2007 is going down as a year of heavy turbulence from an economics perspective. Alan Greenspan’s book, The Age of Turbulence, develops a good subplot to the agriculture industry’s short- and long-term future. The following are some of the interesting views from the road that encompassed my 230,000 air miles and 70,000 Hertz rental car miles on the back-roads of agriculture this year.
Land values in northwest Iowa that were $3,000/acre are now trading north of $8,000/acre. Coffee shop talk throughout the upper Midwest is that land values will rise to $10,000/acre by 2010. The low value of the dollar is encouraging export markets and modest interest rates, and strong profits from high commodity prices are being capitalized into land values. A change in any one of these variables will dampen expectations on the paper value of land.
Double jeopardy is the game being played with most agricultural commodities. With both fixed and variable input costs nearly doubling over the past three years, bottom-line margins are becoming more like the preboom era. A business that does not have a strong risk management program had better be prepared for severe economic shock concerning losses.
Widening of the gap of financial performance is becoming the new norm. According to FinPak, the high 20% of producers generated a 14% rate of return on assets (ROA), while the low 20% generated negative 2.7 ROA. How did the successful ones do it? Earns and turns, or margin management and asset utilization. Some farmers and ranchers know how to strategize and execute, while others just don’t get it. Asset appreciation in land has kept these producers afloat, but is the economic iceberg ready to sink the business titanic?
Read the complete article at http://cornandsoybeandigest.com/davidkohl/agriculture-age-turbulence/
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