Episode 100: What’s Ahead for Agriculture

Welcome to our 100th Field Notes by AgChoice podcast! Our special guest is Dr. David Kohl.  Dr. Kohl has keen insight into the agriculture industry gained through extensive travel, research and involvement in ag businesses. During this podcast, he will share his perspectives on what’s ahead for agriculture. 

Transcript

What’s Ahead for Agriculture

We recently interviewed Dr. David Kohl in a special 100th episode celebration of our Field Notes by AgChoice podcast. Dr. Kohl is professor emeritus and academic Hall of Famer in the College of Agriculture at Virginia Tech. Dr. Kohl has a keen insight into the agricultural industry, which he's gained through extensive travel, research, and involvement in ag businesses. He has traveled nearly 10 million miles, conducted more than 6,500 presentations, and published more than 2,250 articles in his career. He's also a business coach and part owner of Homestead Creamery, a value-added dairy business in the Blue Ridge Mountains. Click here for the full podcast: https://www.buzzsprout.com/960592/9917582

Dr. Kohl: It's great to be here. It's just an honor to be on the 100th. Raechel, when did you start doing these podcasts?
 
Back in March 2020. When the pandemic hit, we wanted a way to really communicate with our customers and others in the industry. That's when we started, and we've made it to 100 here today.
It's interesting. I have done 251 web and Zoom casts since March 2020 all around the world. I was in New Zealand recently and we went over to Sweden. It interesting how the pandemic changes.

Let's dive right in and get to some of your perspectives on what's ahead for agriculture, Dr. Kohl. We're coming up on two years of living in the global pandemic and it's certainly impacted all of us in countless ways. From your perspective, how has the pandemic changed agriculture?
I think one of the things that we've realized, Raechel, was that we had a lot of consolidation in agriculture. The pandemic accelerated the importance of supply and marketing chains, and we're really experiencing that aspect right now with bottlenecks. Whether it's technology or manufacturing in agriculture, supply chain issues were coming. The pandemic just accelerated those. We found out that agriculture is very important when we saw empty grocery shelves. This relates back to some of the processing and the supply chains. Over the past couple of years some real entrepreneurial agriculture producers have really expanded on the niche markets. People want to know where that food comes from, and they want to make sure they can get the food and have a good experience.

The other element that we found is that this pandemic spread very, very fast. I'll give you an example, when I used to travel back in the 1970s for basketball, about 300 million people traveled per year. Just before the shutdown and the pandemic, it was 2 billion people that had traveled by airline. What we have found is that COVID can spread so fast. When media gets politicized, it can change the business models very, very quickly.

During the pandemic, we found out that we had to adapt. More and more people are working remote. We're doing things a little bit different now. Sometimes a black swan like this, an unusual event will really accelerate thinking. The last element we're seeing is rural renaissance. People want to move out of cities and you're experiencing it in your area. There is this feeling that you don't know who your next-door neighbor's going to be tomorrow. Those are some of the things the pandemic has changed, not only here but around the world.

There have been lots of challenges, but certainly opportunities along the way. It's been great to see agriculture take the bull by the horns and use that to our advantage in some ways. 

Now let's turn and talk about something that's on all farmers' minds right now, high input costs, particularly fertilizer prices. Dr. Kohl why are we seeing those increases and how long can we expect them to continue?
It's real interesting that you mentioned that. We're doing budgeting for our farms and actually we're going to go to poultry later this year. We want to build up organic matter and we're going to use biologicals. We're using it for a paradigm shift. Over 30% of our fertilizer comes out of China and a large part of our nitrogen comes out of Russia. As we mass troops on the Ukraine border or there's a threat in Taiwan, any element increases the price of fertilizer. Secondly, we are de-emphasizing fossil fuels. The fossil fuels are directly related to fertilizer and sprays. One thing that I’ll say is that I think we got out ahead of our ski on this green movement and disinvested into the fossil fuels and some of the fracking and just the other elements. This ripples right through fertilizer and chemicals.

Another issue is the supply chains. When you talk about supply chains, everybody thinks about the ports of Los Angeles or that 80% of the global trade has to go through either the Suez, the Panama, or the South China sea. When the ship got stuck over there in the Suez Canal, this all ripples through. Something that is really creating inflated costs is our labor. What happened was that we had the generous stimulus checks combined with the extended unemployment and we paid people not to work. That really is created this labor shortage.

One of my favorite things to do when I travel is to talk to shoeshine people in the airport and truckers out on the road. I could see this one coming actually three, four, five years ago. When I was talking to my trucker friends at truck stops a number of them were saying, "We're getting regulated. We need so many hours of sleep and we can't take our power naps anymore." All you’ve got to do is look at your interstates nationwide. There was a number of trucks piled up and then the baby boomer truckers basically said, "We're out of here." A confluence of events occurred. What’s interesting is that it's such a shock to us because when you go back to about 1992, 1993, consumer price and producer price inflation only exceeded 5% one time. We've been lulled into this low inflation. Of course, when you go back to the '70s it hit 15%. During World War II it actually hit at 20%. It's a shock to our system out there.

Then the other aspect was what I call double barrel approach. The fed basically made very common actions and then the government sent out, think about it $7 trillion worth of U.S. money. On an $85 trillion world economy, 14% of it was a government check. It wasn't only the checks here in the United States of America, but it was worldwide. You put all those together and this inflation is going to hang around for an extended period of time. The fed cannot solve this by raising interest rates because it was the double barrel approach. We've never had that double barrel approach with both monetary and fiscal policy. Here's what's on hybrid screen and I'm watching real closely: I watch oil prices because that's going to dictate your fertilizer prices and it's going to dictate some of the other costs too.

The other thing I'm watching closely is consumer confidence. I watch the indicator that comes out of the University of Michigan every month. Right now, it's down in the 60, 70 range, and the consumer is not that confident. If that goes up to 90, then you're going to see this inflation stay around. Of course, we’ve got geopolitics. We have something, the skirmish over in Ukraine or over in Taiwan, all bets are off. Finally, my good friend, Eric Snodgras is with Nutrient Management. We do so many programs together, I call him Eric the weather guy. We've got to watch weather really closely because weather in the Southern hemisphere of the world is going to dictate not only input costs, but also the prices we receive. That was a long answer to a short question, but those are some of the elements. It wasn't just one thing; it was the confluence of things.

Are there any other economic indicators that we should be aware of or concerned about?
One of the things that I'm very concerned about is trade policy. We have no trade policy regarding agriculture and manufacturing. One in five dollars of net farm income generates through export markets. There is no clear policy. If I'm into soy milk, one in six days of milk now is exported. We look at poultry and all the things that are in the AgChoice area and I am very, very concerned. We had a chance to be a part of the Trans-Pacific Trade Agreement (TPP). When we decided we weren't going to be involved with it, guess who came in and applied and they're trying to be ratified? China. They also have what they call the Regional Comprehensive Trade Agreement, which they developed amongst the Asian nations. They have a lot of global trade policies. I'm extremely disappointed that there's no clear-cut agriculture trade policy.
 
The other thing I think we've got to be concerned about is the Fed. They're going to be meeting here in the next couple of days. They've signaled they're going to raise the interest rates possibly three times. Now, they're going to be walking a tight rope. If they increase rates too much, it's going to throw the economy into a recession. It is interesting. We're doing the cash flows for the creamery rate now, and we've got some money on variable rate. I put in a 25 and a 50-basis point or a quarter and a half percent in increase in interest rate. Worst-case scenario, we'll put in three quarters out there.

 The other thing that concerns me is the consumer trends to the nontraditional milk or meat products. They are gaining hold. Last week when I was talking to a group in Myrtle Beach, KFC announced their plant-based initiative. A lot of the big companies who are in traditional meat or milk, have been making investments in these areas. This is also one of the biggest trends in China youth; I call China youth 20 to 40 years of age. They want plant-based products. That's a trend that's gaining momentum out there. Then the last one is called ESG: environmental and social governance. What's happening is that we have activist investors like Walmart, Kroger, and other big companies. The activist investors and the consumers are demanding some benchmarks and some targets as far as environmental and social governance goes.
 
 As an individual producer out here, one of the things you're going to hear more and more about is whether it's animal welfare or whether it's environmental. At our Creamery, one of the large grocery chains asked us, "What are your ESGs?" I basically gave them three or four things. We produce milk in the glass, and I gave them a profile of our workforce, which is 52% male, 48% female, and 35% minority. I gave about four or five other things because I was geared up on this and they said, "Oh, okay. You can still sell your product." Those are some of the things that I see very, very important as far as key issues.

With so much uncertainty in the markets and the world around us, how can farmers position their business for future success?
I've got a phrase “manage the controllable, manage around the uncontrollable.” I told the group in New Zealand the other day, "You can't manage what comes out of Washington, DC or Beijing or Brussels or down there in Wellington." I said, "If you concentrate your energy and your time on that, you're going to be very, very discouraged. As a matter of fact, what you're going to do is tread water." One of the things that you’ve really got to do is put energy toward the things that you can control. Maybe for you it's focusing in on the inputs. I think it's going to be a three-prong approach. It's going to be price, input costs, and interest rates. How are you going to be able to manage or focus on those? You need to use old-fashioned budgets and spreadsheets. Then once you do, you develop your financial sensitivity analysis.

I think one most powerful statements for 2022 is going to be your cash flow statement. A lot of people throw up their hands, "Oh, I can't predict it. I don't know what prices are going to be or what crops are going to be or what input cost will be." That's where you do your “but what if” scenarios. As a matter of fact, that's one of the things I'm going to be doing in the next couple of days, is doing those cash flow budgets. Here's the other one: you can't look at your financials once a year. Only looking at your financials once a year in November and December is out. Matter of fact, at the Creamery right now, we're down to managing our financials weekly. Did you hear that? Weekly. What it's helped us do is tweak our business strategies.

We ran into a young farmer deal here this past weekend. One of the things that we ask them is “What's one thing that you got out of the program?” They say that they developed the business plan, but the business plan is a living, breathing document. In other words, what happens is you occasionally look at it and you tweak and you just schedule. It's like a football game or a basketball game. Those are going to be some of the elements that I think are going to be very, very important. Also, you don't have to go at it alone, both for input and for mental health. Sometimes talking with your lender, talking to the agribusiness person, or even talking to the consumer out there, will give you that balanced approach and help to understand that we're just not facing that mountain ourselves. I want to give a plug out there for that as well.

No, that's a great point there, Dr. Kohl. We aren't alone in agriculture, so let's work together, let's use our resources, and that’s what agriculture is about. There is a lot of uncertainty, but a lot of folks are around to help too.
I tell the people, "Good people find good people." 30, 40 years ago, I was making a move from Virginia Tech back up to Cornell. I made a lot of nice contacts down here. Old dairy farmer said, "Remember," and this was over milking a cow, "good people find good people no matter where you go in the world."

As we wrap up, I know our listeners would love to hear what excites you the most about the future of agriculture.
I thought about that, and you know what excites me the most? I am excited about your program for young, beginning, and small, minority type farmers. I do about 20 to 25 programs nationwide and oftentimes they're multiple day programs. I'm so excited because these folks are just like sponges because they're out there to try to learn. In other words, they aren't going to throw the older generations under the bus, but they want to do it different and build upon that expertise. They're into everything, even gig income. They might be a welder, they might be an ag teacher, or they might be an agricultural lender. One of the things that they found is that sometimes those outside gigs bring in revenue. It also brings in expertise because you see how other people do things.

That's one of the things that I find very, very exciting. For your footprint and I'll say it for our footprint, a third of the population is right in our back door. It's a third of the population that has money. One of the things is growth in the niche market, the ag entrepreneurism, and value added are going to be very big positives that I see out there. The other element that I find, is with agribusinesses, AgriLending institutions, and educational institutions in agriculture. They want to give back with not only money, but also time. You don't get that in other businesses and other types of industries. Particularly, we're going to see more and more of an entrepreneurial type of mindset out there, which is really critical.

Somebody asked me the other day "Well, you're going to bring good news to us?" I said, "It depends on how you interpret it." I’m very positive for agriculture for the good manager. In other words, they can put the of production together but also the management, the finance, the operational efficiency, the risk management. When they can put that all together, it's going to put the odds in your favor. Am I going to guarantee success? No, but it'll probably put you seven or eight years out of 10, you're probably going to be successful.

When it's all said and done, and you've experienced it by raising your children or taking someone that has an interest in agriculture. We got an 11th grader that's working on our farms. We're breeding cows using the ultrasound machines and using some of the technology. He was asking questions and just soaking it right up. The best crop you're ever going to raise is going to be your children or maybe that young person that has interest in agriculture. If you can't get excited about those comments, then you're probably listening to the wrong podcast.

Well, thank you Dr. Kohl. Those are some great comments to end our podcast on. We always appreciate having you to share your insights and perspective. Thanks for being on our podcast and helping us celebrate our 100th.
Congratulations on the 100th, it takes a lot of organization and coordination. I tip my hat to you all, and I always enjoy working with you all. Again, your young farmer program where you work with other key players in the industry is great. You folks are out there on the leading edge as far as educational programs for the agricultural industry.