What we need in 2020

It seems at the end of the year, thanks to Dave Letterman, everyone is publishing their list of the top 10 2019 events and 2020 trends to watch. After reviewing and digesting the many conversations, listening to industry experts, and analyzing our own data, as well as coming off a two week tour (Chicago, Orlando, Miami, Little Rock, Dallas, San Francisco and Seattle) involving meetings with dozens of producers, investors and lenders, we have formulated our own summary of trends relevant to what we do, and for our customers to keep an eye on. Some of these trends may sound scary, but the reality is, there’s an opportunity in every situation.

Vulnerability

Vulnerability - this is the key word to focus on in the near term. In the Ag Industry, we have experienced decreasing commodity prices and are carrying historically high debt levels, which are reported to be nearly double that of other industries. As a result, and not surprising, there is increasing pressure on profits, and pressure on access to labor. To top it all off, there is increased pressure from the regulatory environment, and ongoing trade disputes. There is increased consumer scrutiny and interest in the ag value chain, which is quickly on its way to consolidating from a multi-step to a two-step process. In response, the supply chain is tightening with increasingly tailored services for a diverse consumer, leading to accelerated consolidation of not only farms but input providers as well

While this may seem like an uncertainty, vulnerability can be used as an opportunity if we are disciplined, vigilant and agile. We must be highly adaptable, accept innovation, and be laser focused on risk management.

Economics

We have and continue to enjoy low, stable, interest rates and energy costs helping offset the soft commodity markets. For the disciplined and proactive this creates opportunity.

Land values are nonetheless stable and proving resilient. Fortunately, or unfortunately we still have too much dependence on government income. There is a disconnect between the value of the land and the value of the commodities, which admittedly, does not seem to add up  other than perhaps low interest rates, energy costs and support helping prop these land values up. Having graduated from college in the mid 80’s, working my first job in the OREO (Other Real Estate Owned) department at Farm Credit I can attest, the farm crisis of the 80s felt a lot more severe than today, but not by a lot. Of special note to our investor friends… asset quality is important in a down cycle as we may see. I’m not sure when we will see the next down cycle, but if interest rates or energy costs increase and/or support curtailed land values are likely to fall. Asset values may be more dependent on low interest rates than many of us are willing to admit.

The effect on asset values are highly vulnerable right now to inflation, energy, government support and leverage. Net farm income to rent prices are holding and predicted to improve in the near term. I am grateful but would have expected more downward pressure as a result of the economics.

Economies are cyclical and eventually there will be a broad downturn. With such low interest rates, our leaders and regulators ability to influence a recession is limited.

Capital Resources

The Ag industry is rapidly consolidating, and the availability of outside capital doesn’t seem to be slowing. Fewer and fewer farmers will be producing more and more - vertically. Nuveen is the latest example, who just raised close to $500m in their latest ag fund, and we can site another dozen similar examples. The ability to scale up is improving and accelerating. Biotech, ag tech and big data in the consumer driven agribusiness model will be the norm. I see no slowdown in the availability of outside/venture or private equity capital. Agribusinesses will continue to scale up, more and more led by elite CEO type farmers on a multinational scale. Farming is no longer just a lifestyle; it is a business.

Politics

The trade war has had the benefit of reshuffling the cards. Now that we’ve got everyone to the table, we need to agree to fix the problem. We must decide to find a solution instead of agreeing that we have a problem and continuing to argue over it. Open trade is the best path to prosperity, but the reality of self-interest enters and hence the original and ongoing impasse. Everyone has a constituent. The US has been the world benefactor since World War II. Let’s get this moving. Ideally, trade needs to be based on market economics and not politics. Unfortunately, I fear that it will take a crisis to resolve.

As we look further down the road, agriculture will have less influence in the political process. Ag Tech will continue to disrupt labor, logistics, inputs and commodity sales. Ag Tech will continue to influence the rise of automation and sharing of data leading to greater transparency in the value chain all the while less technical global infrastructure changes will increase competition in South America, China, Eastern Europe and Africa. I hope your spurs are sharp and true.

Labor

Immigration is controversial and complicated. There are many programs available, and while they work to some extent, they are bureaucratic and cumbersome. We need labor and productivity in order to operate and remain globally competitive. Too much production is put at risk because there are not the people to harvest, process and move it. Immigration reform will be a major issue to all in ag for years to come. However, the opportunity here is to increase automation to become less labor reliant. This will happen in the private sector and ag-tech industries.

The Changing Consumer

There is an ongoing and increasing attack on animal proteins. Alternative products for animal proteins are gaining momentum. Well-respected experts have estimated that 10% of our proteins will come from plant-based sources within the next five years. Agriculture needs to keep these consumer trends in mind as we plan for the future.

Agriculture is ripe for an unparalleled disruption. We must increase sustainability, traceability and transparency. Millennial, Gen Z and Gen A will become the largest, most diverse and most influential segments of our population. These are consumers more interested in  the experience, where they connect on shared values - which to them are more important than facts. Food consciousness is going to compound. Differentiate, innovate, integrate and gain the consumer’s confidence.

Discipline

Fortunately, the farm sector has time to catch its breath, strategize and re-balance. This takes incredible discipline, especially with low interest rates. Leverage in the ag economy is nearly double what it is in the rest of economy and is a vulnerability. Inflationary pressure may force the feds hand and interest rates would then be expected to rise. Social Security, pensions and life insurance companies are under incredible pressure with legacy liabilities to offset. They are essentially underfunded and seeking safe real asset type investments with stable and predictable yields. Growers and processors must reduce leverage in the face of tempting low interest rates while simultaneously being more creative in sourcing capital.

The Future of Ag

The only thing for sure in the next few years, is that this industry will change faster than we’ve ever seen it. This will take a major shift in the mindset to allow for progress and growth.

Risks, which have not been associated with this segment have to be taken into consideration.

The economics of land value, interest rates, and markets are changing rapidly, with multiple factors to be aware of.

Capital resources will come from nontraditional sources, and that will have influence over production and progress.

Politics will always play a primary role in the trade wars. The ag sector and rural representation in congress is getting smaller and less influential – so the voices must be bigger and more powerful.

Labor will continue to be a hot topic, and there are no clear answers or short-term fixes. This is an issue that runs deep. Technology and policy will help, but it’s up to the growers to find short term solutions.

The consumer rules. It doesn’t matter what the history or even the productivity of our land is, if consumers do not want what is produced on it. Today, it only matters what they want, not what we want to produce.

Farming has been a lifestyle, and something that we talk about in great respect and honor. However, it’s time to be disciplined, and make changes, and make the hard business decisions.

The future of ag is bright. It’s not going to be easy, but it will move fast, reward innovation, and will continue to feed, fuel, and clothe the world.