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January 11, 2023
The window is closed on 2022, and strategic planners are envisioning the game plans for the quarter century and beyond. There appears to be a global economic slowdown with recessional times in Europe and emerging nations. China, the second largest economy in the world, is in a growth recession with current gross domestic product (GDP) growth numbers between 1% and 3%, down from double digits a decade earlier.
In the United States, parts of the economy are doing quite well, such as travel and social experiences feeding off the stimulus savings and loose fiscal policy. As of this writing, the recent restrictive monetary policy has reduced paper wealth of approximately $20 trillion in cryptocurrency, equity markets and the early stages of a housing recession. The Federal Reserve, in its wisdom to defeat the dragon of inflation, will most likely overshoot interest rates which could set up a recession for many segments of the economy.
Agricultural producers and their lenders are reporting very strong financials boosted by government stimulus checks, paper wealth gains in land, and the economic advantages of solid commodity prices before input costs and interest rates ascended. 2023 is stacking up to be a transitional economic year. However, stakeholders in the industry are very cautious as we move toward the quarter century mark due to the hangover of the global recession, geopolitical military action and the “flip the switch'' policies by governments and institutions to steer the economic ship through choppy economic waters. Let's examine some of the bigger macroeconomic and social disruptors that could influence both short and long-term strategies of the agriculture industry.
Many segments of the U.S. agriculture industry are export based. Over 70% of cotton production and 50% of soybean production are exported. Dairy, hay, fruits and grains are also very dependent on the ability to trade. A de-globalization trend, accelerated by the global pandemic, the war in Europe, and global political leadership appears to be accelerating. These factors are creating extreme volatility in prices received, input costs, and, to some extent, interest rates and currency values.
As authoritarian leaders such as Mr. Putin, Mr. Xi and others in emerging nations oversee extended terms, they tend to move toward more control and original political doctrines such as communism. These closed mindsets often move economies to operate with trusted partners on a regional basis. Any spats, such as the war in Europe and possible conflict in Taiwan or North Korea, could create sudden impacts on an industry’s or a country's economy.
Supply chains such as manufacturing, technology and agriculture move toward trading with global blocs such as North America, Asia, Europe and selected emerging nations. Asia, and particularly China, will have direct trade with South America and other leading commodity producers. Approximately 60% of fertilizer is produced and processed by authoritarian economies which will trade first with other nations that support their countries, then second with western nations. This is setting up a situation where western nations will be trading predominately with each other, and authoritarian economies will do likewise. The implication to the agriculture industry is a strategic plan with a lot of “stretch in the belt'' when it pertains to marketing, operations and finance. This will place a high premium on business IQ and cash flows that are closely monitored with various adjustments as changes occur.
Demographics will be an important consideration moving forward. Peter Zeihan, the author and speaker, has many great readings and a podcast on global demographics and how it will shape social, military and political strategies of various nations. China, Japan, Europe and Russia all face aging societies that will place pressure on workforce dynamics, healthcare and government budgets. Demographics will be imperative in trade negotiations and a country's ability to grow GDP and remain competitive. In the United States, a regulated immigration policy is critical to create the dynamics necessary for a productive workforce.
Demographics will play a huge role in the asset structure of American agriculture. The average age of American farmers and ranchers is increasing. However, the operations are quite segmented with a strategy to control assets rather than ownership of assets. Baby boomer producers, born between 1946 and 1964, will continue to purchase farm and ranch land until the median age of 78, which will occur around 2033. Land is a very appealing asset to both farmers and investors when compared to stocks, bonds, residential real estate and cryptocurrency. This is a very important aspect for stability in agriculture because land is the largest asset on farm and ranch balance sheets, on average comprising 82% of total assets.
However, every major agribusiness company and business must have a transition plan or strategy as a high priority. There are two parts to an effective transition plan. The first part is an estate plan which is the transfer of assets. The second part involves the transfer of business management. Is your business culture one that builds new talent or limits the new group's potential?
Ask any retiring agricultural lender or agribusiness person what the biggest observation of their career is, and the answer will likely involve technology. Technology integration will continue at an accelerated rate.
The integration of biology, engineering, data and information will be the competitive edge for many. The key is the integration and not operating the business in separate silos. A prime example is robotics in the dairy industry. Yes, robotics can reduce the total requirements for labor, but the labor has to have a data mindset that can link the efficiencies of biology, data and the engineering of robotics to an individual cow or calf.
Moving to the field, variable rate fertilization and seed application and yield monitoring bring efficiencies to the bottom line with increased yields and reduced costs. While automation comes with a price, initial costs, downtime and unintended consequences, the linkage of production output from the field or the animal to the processor and the store will provide the transparency that many consumers and society may be demanding in the future.
Technology and innovation, without automation, will be appealing to low overhead and low-cost operations. Regenerative practices with the necessary processes and protocols will provide added value to the segment of customers that demand it. The key for strategic planners is to analyze land, labor and capital resources to align with the constantly changing marketplace.
In previous publications we have conducted a deep dive on this disruptor. A new mindset is now emerging with this segment where one-size does not fit all. More women and minorities are changing the demographics and bringing a new energy that says, “Let's try something different,” versus, “We have always done it this way.” While family businesses are predominant in this group, the future will involve cousins managing with cousins and outside family business partners. Some new entrants will be boomerangers bringing outside views of management to the agriculture industry after completing other careers. A high-energy group of agri-entrepreneurs with the ability to integrate production, marketing, finance and operational techniques in a successful business model to the consumer bode very well for the industry.
Environmental, social and governance principles (ESG) will ebb and flow over the remainder of the decade. Activist investors and corporate boards aligned with societal change will influence how agriculture conducts business. Rather than staying at the corporate level, these practices will filter down to individual farms and ranches.
Most agriculture producers know the importance of soil and water health for the sustainability of the business and overall environmental health. The agriculture industry is often very generous with social and community programs. The workforce of the agriculture industry would suggest that, while not perfect, diversity and inclusion practices are noticeable. While producers often see ESG as a threat or take a defensive stance, the agriculture industry utilizes many positive value-added practices.
The key is to tell the story and accentuate the industrious, positive attributes and possible corrective actions.
The first thing many farmers and ranchers do when they rise in the morning is to check the weather. Years of being on the speaking circuit with Eric Snodgrass of Nutrien Ag Solutions has raised my respect for weather’s impact on business profits and also for societal change. In the future, weather will be important in agriculture beyond the fields. One example is the recent low water levels of river systems in the U.S., China and Europe. These rivers highlight the importance of the weather’s effect on the flow of goods and services and the overall economic health of a nation or region.
Weather in the U.S. often starts in the Himalayan Mountains and flows to Japan and then to the Northwestern part of the United States. On the other hand, weather in Europe starts in the Rocky Mountains. Understanding short and long-term weather patterns will be critical in executing marketing and risk management programs and the operations of individual businesses as well as agribusinesses, processing and transportation. As Eric says, “Expect weather in extremes. Develop countermeasures and practices to take advantage of minimizing risk or maximizing the impacts of weather changes.”
Some of the greatest disruptors will occur in the food and energy sector. The movement from fossil fuels to green energy will create economic and societal volatility. Governments in western nations such as in Europe and North America are accelerating this change through various regulations, incentives and mandates that will impact the agriculture industry. As a result, many unintended and disruptive consequences will occur.
China, for example, is building coal plants, prioritizing economics over the green movement. The integration of green energy programs with the lack of infrastructure for economics could be very prevalent in many regions of the country and around the globe. This could create shortages and supply chain issues in the food and energy sector that may lead to social disruption. Often the agriculture industry is front and center for these disruptions because agriculture is necessary for a society’s economic health and harmony.
Substitutes for traditional food are rapidly appearing in the marketplace. Lab-cultured meat and plant-based alternatives are now entering the cost reduction phase as distribution channels are expanded. Synthetic milk that tastes like milk, not almond or oat, is now on the shelves in Oceania, particularly in Australia. Traditional markets will be challenged in the future and they must reinvent themselves and align with the demands of the marketplace that are constantly shifting.
A tool to analyze the aforementioned changes and trends is to conduct a good old-fashioned SWOT analysis, that is analyzing strengths, weaknesses, opportunities and threats. This could be done for your business and, to some extent, state, region and nation. In your analysis, consider a historical perspective. In other words, examine what the major disruptors of the last century were and how it impacted the industry and the players involved. Who were the winners and losers? What were the best practices to capitalize on the challenges and opportunities? Sometimes when analyzing the future, you must look into the past; however, often what got you here will not get you there!