Jul 16, 2020

Ag Economy Experts Discuss Impact of COVID-19

For the first time since 1959, Dr. David Kohl, one of the nation’s leading authorities on ag economics and finance, has not been traveling multiple times a week to speak about the ag economy at events around the country.

Instead, webcasts have allowed him to give presentations around the world – and he’s done a lot more farming and spent more time in his creamery. When David took his wife to visit their granddaughter recently, it was the first time they’d been out of state in more than 3 months.

He’s also been giving back by finding ways to connect even while maintaining social distance. A few times every week, he reaches out to former coaches and others isolated in nursing homes.

“One person I’ve been reaching out to has been writing dates on his wall – almost like a prison,” David notes. “The last time I talked to him, he had 98 dates written down. When I get on the phone with him, he’s just so happy. He always answers on the first ring. He’s just so grateful that someone is reaching out. It’s a chance for me to give back. You can’t put a dollar sign on that.”

 

The ‘Black Swan’ Has Landed

While David appreciates how COVID-19 has allowed him to slow down a bit and re-evaluate life, he’s still keeping a watchful eye on the ag economy and how the pandemic is impacting it – and the rest of the world.

Dominating crucial conversations – whether among bankers, academics, producers or those in healthcare – is uncertainty.

“There’s uncertainty over trade, government payments, interest rates, the consumer, just a whole host of things,” David notes. “What’s happening is there’s no set path. Everything seems to change in a New York minute.”

The “black swan” so often whispered about in economic circles has landed, David says. Trained in psychology as well as economics, David says as with any major event like this, the “black swan” will go through 3 phases.

“The ‘dirty bird’ dumped on us March 1 through May 1,” David explains. “We’re now in the ‘angry bird’ phase, which is filled with uncertainty, different plans being proposed and countries bickering. That will heighten in October, November or December. Eventually we’ll go through a phase that’s like a phoenix rising from the ashes, where that negative energy becomes positive energy.”

There is usually some type of black swan event every 10 years. This one is super-generational – it’s touched every generation and everyone in the world, David remarks, adding it will shape future generations for years to come.

 

The Pandemic’s Impact on Producers

The negative economic effects of the pandemic have been felt far and wide – and agriculture certainly wasn’t insulated.

Supply chain disruptions were especially hard on livestock producers, notes Lynn Paulson, Bell Bank director of agribusiness development. In some cases, animals that were ready for processing had to wait, because processing plants shut down due to workers infected with coronavirus. And in extreme cases, animals that couldn’t be processed were euthanized – even at a time when the meat sections of some stores were relatively bare.

Losses for some were opportunities for others. A shortage of meat processing capacity meant local butchers have been inundated with processing requests. 

Another casualty of COVID-19, with so many people staying home, was a plummet in gasoline consumption, which led to a drop in demand for ethanol and the corn used to make it. 

“At one time, up to 50% of ethanol capacity was offline,” Lynn notes. “That lost demand for gasoline, ethanol and corn is gone forever.”

 

A Long, Cold Winter

COVID-19 came after a tough year for many producers in 2019, with strained working capital levels due to operating losses or cash flow shortages. 

“Additionally, many farmers in our area were unable to harvest the bulk of 2019 corn until the spring of 2020,” Lynn points out. “Many of these late-harvested corn acres did not get planted to 2020 crops and will be prevented plant claims for crop insurance. Reasonable interest rates and relatively stable land prices continue to hold up many in the industry.”

The pandemic plunged some producers into a deeper, longer winter, while others are able to readjust their business model to capitalize on some of the market trends and opportunities – such as increased consumer interest in locally processed foods, David comments.

As in past years, some producers continue to be profitable, Lynn confirms, noting that modest-sized, mature operations, with a solid land base that’s largely owned with limited debt, often do quite well. 

Still, David says even producers with good business IQs can be plunged into that winter if they don’t have somewhere to market their product.

“You’ve got to control what you can and manage around the uncontrollables,” David affirms. “If you try to manage the uncontrollables, it will emotionally drain you.”

So far this year, crops are generally are off to a decent start – even developmentally ahead of last year at this time.

Meanwhile, producers continue to keep a keen eye on trade issues, particularly the USMCA agreement between the U.S., Mexico and Canada that took effect July 1, replacing NAFTA agreements, and China’s commitment to purchase a substantial amount of U.S. farm products by yearend.

 

Ripping Off the Band-Aid

Trillions of dollars in government stimulus have helped significantly bridge some of the troubled economic waters – for both businesses and individuals – as the health crisis has morphed into a financial crisis, Lynn notes. He adds that for some producers, government assistance has turned a loss year into a slightly profitable one. But he also cautions that the assistance programs come a cost that will be felt for generations.

“Some say additional government debt isn’t a big problem because interest rates are so low, but that’s like going out and buying a $50,000 vehicle at 0% interest and thinking it doesn’t cost you anything,” Lynn explains. “The problem is you still need to pay back the $50,000 at some point – same with all the current deficit spending.”

Short-term government aid is a temporary bridge, giving many producers a false sense of security, David says, adding that ag producers and the general public need a post-government plan.

“Eventually, those programs are going to come at a cost, and we’re going to have to pay higher taxes,” he comments.

 

Boost Your Business IQ

To best survive – or possibly prosper – in this current ag economic environment, David stresses the importance of maintaining a high business IQ. That means budgeting, marketing, knowing your production costs and establishing a risk management program.

For a downloadable PDF of David’s 15-item business IQ chart, click here.

“During the 1980s farm crisis, average and below-average production managers were taken out of business,” David notes. “Now, producers with average and below-average business IQs are being taken out, and the pandemic accelerated that.”

You also need cash, working capital and liquidity – in both your business and household, David stresses, encouraging establishing “plans A, B, C and D,” and having a good team of advisors – for your financial and emotional health.

Ag bankers understand that not every year will be profitable – there are simply too many uncontrollable variables, Lynn affirms. But while equity and collateral are often key to bridging those unprofitable years, at some point, profits are needed to replenish the working capital bucket.