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09/28/2016
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The Big Picture and the Bottom Line
By Dr. David Kohl
Interconnection of the macro global and domestic economy continues to impact and influence
bottom line incomes, cash flows, and eventually the balance sheet. Today’s economic realities
show sporadic as well as weak growth, both domestically and internationally. In agriculture,
economic challenges are magnified as the industry continues to adjust after the recent years of
stellar economic growth and the commodity super cycle. The industries of agriculture,
manufacturing and energy benefited as a result of the demand from emerging nations, the weak
U.S. dollar and the increase in alternative energy sources like ethanol. The era of 2008 to 2013
in rural America could be considered the Mount Everest of profits and asset appreciation,
specifically for land. Could the world be entering an era of economic moderation? Let’s
examine past economic growth rates and factors to find out.
Bifurcated Economy
Historically, the agricultural and general economic cycles have been bifurcated. In large part,
when agriculture is doing well, the general economy is in recession. In the reverse, agriculture
struggles when the general economy is in expansion. This was clearly displayed by the recent
commodity super cycle.
During a time of aberrant profits in agriculture, the large Coastal economies as well as the
Southern economies faced significant recession; actually the deepest since the 1930’s Great
Depression. Centered in real estate, the Great Recession rippled through the service sector with
negative effects for the majority of the U.S. population. Individual wealth, consumer spending
and retirement accounts all felt the impact, particularly with the Baby Boomer and Veteran
Generations.
Internationally, the rich nations of the world including those in the European region, Japan and
others felt the impacts of the Great Recession through the interconnected global banking sector.
During the same time period, emerging nations experienced record economic growth, building
infrastructure and creating a middle-class of 320 million people, which is approximately the size
of the U.S. population.
The Dilemma
Economists often say the United States is like the “best economic house in a bad
neighborhood.” In other words, while not robust, the U.S. economy continues to outperform
other economies around the world. However, when one examines this recovery expansion
period, it is currently in its 86th month and remains unremarkable. In fact, the U.S. Department
of Commerce that measures growth in recovery periods agrees this recovery period is
underperforming.
History of Economic Growth
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The world GDP (gross domestic product) grew by a whopping 7.6 percent and 4 percent
annually following World War II and the Korean War, respectively. Even in the later stages of
the Eisenhower Administration, the economy registered in at 5.6 percent growth rate. One of
Dwight D. Eisenhower’s campaign slogans was, “I like Ike!” which became extremely popular.
Of course, the phrase capitalized on the post-war conversion of military technology and
infrastructure growth to benefit the general economy. Factors such as infrastructure
improvements, growth of suburbia, the interstate road system, technology upgrades in most
manufacturing sectors, and the post-war rebuilding of Europe and Japan combined to create an
economic environment much like the recent commodity super cycle.
During the Kennedy and Johnson years, 1961 to 1969, growth was a stellar 4.9 percent despite
major assassinations and the constant challenges from the Baby Boom generation against
government, institutions and the buildup of social programs.
The 1970’s had short, abrupt economic recoveries of 5.1 percent and 4.3 percent annual growth
rates. The U.S. and global economies were stymied by oil shocks, political discontent, the
Vietnam War, and turmoil in the Middle East. High rates of inflation were also experienced in the
1970s, which led to high interest rates and interrupted growth.
Moving on to the 1980’s, American agriculture and manufacturing were experiencing times of
economic crisis and restructuring. The term Rust Belt became popular as the North-Eastern and
Upper Midwest regions of the U.S. deteriorated after multiple closings of plants and general
decline of the industrial sector. The United States started its move to a service-based and hightech economy. Post-recession growth rates in 1980 and 1981 were 4.4 percent and 4.2 percent
annually. Paul Volcker, U.S. Federal Reserve Chairman at the time, presided over the longest
expansion to date, which was 106 months. During Ronald Reagan’s presidency, the Soviet
Union dissolved and Germany reunited. This provided a psychological boost for investors and
consumers invoking the feeling of good times both domestically as well as globally.
Recessions in 1991 and 2001 were due to war, terrorist attacks and stock market adjustments.
These factors moderated the recovery of the U.S. economy. The growth rate was cut in half
compared to previous periods at 3.6 percent and 2.8 percent respectively; regardless of which
political party controlled Congress or The White House. Agriculture and rural America muddled
along with flat commodity prices. Government payments were allocated to bridge the gap in
profitability and cash flows as the farm crisis of the 1980’s continued to impact the 1990’s.
Next, the global economy was hit by a financial bomb. The real estate collapse and the banking
crisis, particularly with the interconnected global banks, placed the U.S. and world economies
on the brink of a depression. The growth during the recession and post-recession was centered
in agricultural regions including the United States, Canada, Australia and even Russia and
others who produced large amounts of commodities.
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Today, we are in the midst of the third longest recovery period in history, which is 86 months
and counting. The current growth rate over this period was 2.1 percent with an average rate of
1.2 percent in 2016. This brings into question economic policy, globalization, and the stimulus
policies of the U.S. Federal Reserve and other central banks. Specifically, why is economic
growth so underwhelming with all the incentives domestically and abroad? In general, the
global economy seems to be in an era of economic moderation.
Future Growth
Examining future growth rates, the combination of psychology, technology, demographics,
public and institutional policy shifts, and public and private debt levels are all converging as
headwinds for stellar growth. One must keep in mind that emotion and psychology play a large
role in consumer confidence and business investments despite the many sophisticated
prediction models that may indicate otherwise.
Public Debt
First, we need to examine debt levels and their impact. Most developed countries around the
world are increasing their debt levels at astronomical rates. At the end of the Clinton
Administration, federal debt was approximately $5.7 Trillion. Due to military cuts, and increased
tax revenue the Congressional Budget office reported a budget surplus the last two years of the
Clinton Administration. On a side note, this was very important for agriculture because the 1996
to 1997 crisis in the Southeast Asian economies, also known as the Tiger economies,
suppressed commodity prices as well as net income. Government support was dedicated to
boost income and bridge the financial gap. This support was critical for agriculture and also
helped maintain land values.
Since that period, the federal debt has ballooned to over $19 trillion. The debt is over 100
percent of U.S. GDP, which is an alarming increase over the 40 to 50 percent range of the past.
In addition, over 40 percent of the current federal debt is financed by other nations.
Unfortunately, most of the debt has little investment to improve productivity, which would enable
growth.
All of the rich nations of the world including those in the European region, Japan and even
China have increased debt levels. In fact, Japan’s debt ranges around 250 percent of its GDP.
Again, little investment has been allocated to increase productivity which now challenges
growth. China, the second-largest world economy, misallocated capital into infrastructure. This
resulted in lost cities and incomplete roads which impacts growth in the near-term but is not
sustainable in the long-term.
The bold actions needed to curb debt levels were circumvented, particularly in the United
States. The 2011 Gang of Six committee proposed a bipartisan plan to cut three dollars from
the federal budget for every one dollar in tax increases. Largely ignored by a dysfunctional
government, this approach could be a good start to tackle this drag on productivity.
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Dysfunction
Right now, world institutions are experiencing the typical 50 to 70 year cycle where the rate of
change in economics and technology is ahead of a government’s ability to keep pace; thus,
creating dysfunction. Of course, the world is familiar with dysfunction. In Europe, the 1870’s
and 1880’s were a time of unrest and change. This created mass migration to North America
and other parts of the world during that time period. The 1920’s, 1930’s and 1960’s also saw
their share of dysfunction as well. The increase in income to debt levels along with the
ineffectual action from government, and the noise of daily and social media have created a type
of “funk” or stagnating culture for businesses and consumers alike. Most importantly, these
factors continue to inhibit economic growth.
Technology
Next, technology’s role in future economic growth is critical. Yes, technology can improve
efficiency, productivity and quality of life. The more we integrate biotechnology, engineering and
information the more gains we create. The downside of technology is that it creates levels of
regulation that can exponentially increase. This is particularly true with intellectual regulation
and the attempt to eliminate all liability and risk regarding a new technology. While some
degree of oversight is undeniably necessary, one regulation layer has a tendency to quickly
necessitate a second layer, again in the attempt to eliminate risk. Of course, through cost and
inefficiency, this eventually negates any positive, economic benefit intended by the new
technology. In the next five years, more debate on technology’s negative impact on productivity
is likely to occur worldwide.
Education
Educational systems in the United States and abroad have historically been the catalyst for
productivity gains. Post-World War II deployment of Veterans with the G.I. Bill was a boost to
efficiency in the industrialization of manufacturing and service-based economies. This
government support increased incomes which advanced the growth of housing and
developments. In turn, it boosted the economy.
In the past 50 years, more people have earned college and graduate degrees which has been
very important for the growth of services and the service-based economy. However, economic
inflation coupled with the increase in student debt proves a challenge for the Generation X and
the Millennials. The postponement of marriage, children and housing purchases worldwide
continues to stifle economic growth. The economy in today’s current recovery period is growing
at a paltry 0.9 percent annual pace compared to post-World War II of 2.4 percent. Some
contend that the methodology to measure growth and innovation is not aligned with emerging
trends like cloud capacity, smart phone apps and more. However, even with strong job growth
and low unemployment rates, many Americans do not feel more financially stable. The
education system that boosted the economy 50 and 60 years ago is now riddled with increased
bureaucracy and inefficiencies. As a result, debt levels continue to grow, while the economy
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does not. Perhaps the younger generation along with new technology can better tackle our
complicated issues such as efficiency and debt.
Demographics
Finally, one of the major factors inhibiting world economic growth is demographics. Rich nations
and, to some extent, emerging countries are experiencing an aging population. As Baby
Boomers or the “Pig in the Python” as the generation is often called, grow into retirement and
later adult life, there is a tendency to become more conservative financially. One of the greatest
fears in life is lack of income to support senior years. Instead of riskier business investments or
stocks, the Baby Boomers are maintaining cash. Spending patterns of this demographic are
also becoming more conservative, which impacts the large service-based economies of the
world. Additionally, the Millennial Generation is also heavily in debt, but in general exhibits a
more financially conservative philosophy. Cumulatively, the trends of these two generations are
serious challenges for stellar future economic growth, both domestically and abroad. In fact,
much of the growth of youth comes from emerging nations. In Mexico, 47 percent of the
population is under 25 years of age. Unfortunately, they do not have the income or wealth to
drive the domestic and global economies. In short, demographics could be the most compelling
factor in the equation for economic growth over the next couple of decades.
Implications for Agriculture
Today’s macro trends certainly appear to be moderating growth. In any case, extremes and
volatility, both on the upside and the downside will most definitely impact agriculture,
agribusinesses and agricultural lending.
The top half of the balance sheet which outlines current assets and current liabilities will be the
first priority. To capitalize on volatility and a moderated earnings flow, one has to position the
business for capital flexibility. This enables the business to capture profit as it occurs in short,
abrupt windows. Liquidity and easily convertible assets are necessary to cover obligations but
also to capitalize selectively on opportunities. This strategy will be a new reality for most
producers.
Lenders and producers will need to emphasize scenario testing. Today’s margin window is
smaller which requires one to work through possible outcomes. Easily adjustable computer
spreadsheets are ideal for this process as they will help identify the areas of possible profit,
which in turn, can restore liquidity and build earned net worth.
In the future, agriculture will experience less government support, particularly in down cycles.
Proactive, self-initiated risk management will be crucial given the domestic and global economic
opportunities and challenges. Those not willing to adjust, or stuck in realities of another era will
struggle; most likely sacrificing profitability and sustainability.
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Much like a coach or professional CEO, surround yourself with positive, able individuals with
which you can collaborate. This type of interdependence will require highly skilled individuals
and a synergetic approach to management, which may represent significant change for some.
Yet, it will provide dividends.
In a world where the global landscape influences your bottom line, producers must stay
continually monitor changing trends as well as their own practices. Proactive strategies and
collaboration are critical for success. Remain open to change and position your business for
flexibility as the world and agriculture continue to bring challenges and opportunities.
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