How will the COVID-19 pandemic transform agriculture? David Kohl, professor emeritus of agricultural finance at Virginia Tech University, has a few ideas.
The global economy could start to decouple.
“The past four or five decades, we were moving toward globalization,” Kohl says. “Now we’re going to be moving toward decoupling or selective globalization. We had a dry run with the tariffs and sanctions with China in the past year or so.”
Nationwide, $1 out of every $5 of net farm income comes from export markets, Kohl says. Going forward, the U.S. will start evaluating supply chains for risk and looking for opportunities to be more regional.
Prepare for an elongated-type recession.
Many economists are predicting a V-shaped recession, which is when the economy suffers a sharp economic decline, but quickly and strongly recovers. But Kohl doesn’t think that scenario is likely.
“I don’t think it will be a V-shaped recession like in 2009,” he says. “I think it will be more of an elongated-type recession. This pandemic is hitting all of us with a sudden impact and shock disruption. We don’t have a pattern or corrective action yet. It’s taking monetary and fiscal policy combining to solve this issue.”
Land values could find extra strength.
“Since 2013, we’ve been in what I call an economic reset in agriculture, while the general economy has done well,” Kohl says. “Our last line of defense for economic strength has been agricultural real estate values because it provides an equity bridge, which provides an economic bridge.”
Kohl says he’s watching to see if Baby Boomer farmers and ranchers continue to buy farmland as an alternative to the stock market. Also, will outside investors diversity their portfolio into farmland?
In addition to those moving toward farmland as a safe haven for investments, Kohl is on the lookout for any policy changes.
“We cannot have drastic policy changes on refinances for farmers and ranchers like we did back in the 1980s,” he says. “You could collapse 83% of the farm and ranch balance sheet, which is in farmland. Drastic changes can really hinder the strong part of our balance sheet.”
This is a golden opportunity to increase your financial literacy.
One of the benefits of this pandemic—like the 1980s crisis—is farmers will improve their financial literacy, Kohl says.
“Producers will have to have plans in writing, they’ll have to closely monitor financials and they’ll have to have open communication with lenders and others,” he says.
His advice to farmers:
- Develop a written farm budget and compare the actual to the budget.
- Evaluate budgets as economic conditions change in the U.S. and around the globe.
- Develop a personal family living budget and compare actual to budget. This is an area were agricultural producers can work with their lenders to elevate transparency.
- Reestablish your goals and objectives. What is important to you personally and for your business?
- Communicate with your advisory team: lender, crop/livestock consultant, accountant, etc.
- Develop a risk management plan.
“Now is a time to step back and reinvent yourself,” he says. “This is a golden opportunity to do a good-old SWOT analysis. Let’s continue to look for the silver lining in these storm clouds created by COVID-19.”
Watch a recording of a webinar Kohl presented on behalf of Northwest Farm Credit: Hot Topic of the Times
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