Kohl: Next Decade Will be a Wild Ride

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Dairy farming in the United States will change more in the next 10 years than it has in the past 70, predicts David Kohl, agricultural economist and professor emeritus at Virginia Tech.

During, “Get a Grip on Ag Economics,” part of the “World Class Webinar” series sponsored by the Professional Dairy Producers of Wisconsin, Kohl shared his thoughts on the changing domestic and global dairy and agricultural industries, and what it will take to be a successful producer in them in the future.

Economically, he said farmers in general need to be satisfied with more “base hits” and fewer “home runs.” “The markets will be volatile, to be sure, and steadily locking in modest profits – versus trying to hit the occasional jackpot – will be a more prudent way to sustain farm businesses long-term,” Kohl advised. He noted the dairy boom cycle of 2014 was not necessarily a good thing, because it created unrealistic optimism that similar market conditions will return.

Kohl said the critical elements impacting U.S. dairy farming in the future will be:

  1. Technology– Biotechnology, engineering, automation and “big data.”
  2. Consumer preferences– Changes in consumer choices, both here and abroad.
  3. Management– Successful dairy producers will need to be above-average in both their production methods, and business-management acumen.

It’s no secret that the U.S. dairy industry is rapidly consolidating, which Kohl noted will not likely be embraced favorably by consumers. “There is a powerful sentiment of ‘anti-bigness’ in all of American society today, including toward agriculture,” Kohl stated. “Watch it in the upcoming election. It’s a very real issue, and I’m not sure what the dairy industry can do about it.”

That’s not to say, however, that Kohl believes small dairy farms will become extinct in the future. “Often these operations have low overhead, fewer labor issues, and dimensional income from several sources,” Kohl stated. “But they still need to be excellent producers, have goals for their businesses, and be highly proficient in both marketing and financial management.”

Unlike the 1980s, Kohl said the current ag economic downturn has not been especially punishing to young farmers. “In fact, they’re faring better than the more seasoned veterans who have been in the business for 10 to 40 years,” he shared. This is owed to the fact that, as a whole, today’s young farmers are skilled at developing multiple revenue streams; are frugal in family living; have less investment in land and equipment (and thus less debt to service) and approach the business with a positive and skilled mindset. 

And, while dairy farmers recently have endured a particularly brutal economic storm, Kohl said three factors currently are in their favor – milk prices are rising, feed costs are down, and interest rates are low.

Still, there are issues that concern Kohl greatly, and one of them is trade. He said passage of the United States-Mexico-Canada Agreement (USMCA) is badly needed, as those three countries make up 28% of the world economy. “They need to be able to trade with one another more freely, while protecting technological and intellectual assets,” Kohl stated.

China is another cause of worry, and Kohl disagrees with other economists who suggest the current trade war is bringing China to its knees. “China is highly resourceful and resilient, and I believe they’re merely waiting us out through our next election cycle,” Kohl stated.

He said the Chinese Belt and Road Initiative has spawned heavy investment in food infrastructure worldwide, including the development of 28 new grain processing plants in Brazil and Argentina. These sites will service not only China, but the entire Asian Rim, where 3 out of every 7 people in the world soon will reside. “That’s where a lot of the world’s wealth will be concentrated, and they may have already effectively cut North America out of a significant role in feeding those people,” said Kohl.

Domestically, Kohl is concerned that the grocery industry is driving food production, instead of the other way around. When it comes to milk, for example, grocers feature it as a loss-leader. “They also want to know where the milk they are selling comes from, and they want to work with fewer suppliers,” noted Kohl. “That’s already caused significant disruption in the U.S. dairy industry.”

Looking toward a successful future in which independent farmers can continue to play a viable role, Kohl suggests a formula of “P=O+C+L+M2.” The “P” stands for Profitability and successful People, who must keep their Overhead low; build adequate Capital; maintain Liquidity; and have excellent Marketing and Management. 

“The human element of successful farming will be more important than ever in the future,” stated Kohl. “Farmers are going to have to be more collaborative and interdependent. That can be challenging for farmers and against the nature of a traditionally proud, independent, self-reliant class of people, but it’s going to be necessary in the new era of agriculture that’s coming.”  

You can keep up with Kohl’s perspective and commentary via a regular column he writes for Farm Credit Services, The Ag Globe Trotter.

 
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