- Develop a sound risk management program including marketing, hedging and crop insurance.
- Volatility creates opportunity for agriculture.
Agriculture may see more volatility over the next decade than it has in the past 30. That means more opportunity, says David M. Kohl, professor emeritus, agriculture and applied economics at Virginia Tech.
“Volatility creates opportunity,” Kohl said as keynote speaker at the second annual Rural Economics Outlook Conference in Stillwater, Okla. “But producers also have more opportunity to fail,” he said. “The extremes get you in trouble.”
He calls those extremes “black swans,” birds that are rare but show up occasionally to make life interesting.
Possible black swans for agriculture include oil, sovereign debt issues, social unrest and other factors such as weather. He said the oil issue “will not go away, but in Oklahoma it’s also a revenue source.”
But oil prices too high will damage the economy. “Oil at $200 a barrel will create a world-wide recession,” he said.
In fact, six of eight recessions in the past 50 years were due to oil. Some 70 percent of oil produced is from a military or politically sensitive area. And 60 percent of fertilizer is dependent on those same areas.
Consumer reaction to oil prices is predictable, Kohl said. “At $3 to $3.50 a gallon for gasoline, consumers lock up. At $4 a gallon they shut down.”
Kohl said farmers and ranchers have to develop management strategies that offer some protection against the black swans.
He also said agriculture needs to watch the emerging BRICS nations—Brazil, Russia, India, China and South Africa— that will affect global markets. “All five have increasing demand for food, fiber and fuel,” Kohl said.
“The long-term viability of these nations will be defined by the way they handle adversity.” He also noted that several of these nations are looking to invest in agricultural production in the Southern Hemisphere to “add another source of food, fiber and fuel.”
The BRICS will also face economic challenges in the next ten years. Kohl said that if emerging nations enter a recession “for an extended period of time,” commodity prices are likely to collapse.
He referred to the current economic climate as a “Swiss cheese economy, with strong areas and black holes.”
Developed nations face some “headwinds in the second decade of the 21stCentury,” Kohl said. Challenges include public debt, an aging population and entitlements that countries may no longer be able to afford.
Game changers for agriculture include some tailwinds, positive forces, such as “islands of prosperity for row crops in the Upper Midwest and Canada, export potential for China and Asia, ethanol, low value of the dollar, good weather (for the Midwest), bullish land values and low interest rates.”