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Watch out for the burst of the asset bubble

By Janet Kubat Willette

Date Modified: 02/19/2013 1:45 PM

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MINNEAPOLIS — Agriculture is in the midst of a super sized super cycle, David Kohl said during a broad-reaching presentation at Minnesota Pork Congress.

Kohl is an agricultural and applied economics professor emeritus from Virginia Tech in Blacksburg, Va. He is a sought-after speaker who gave presentations in 39 states and five Canadian provinces last year.

Kohl outlined the last century of super cycles in agriculture. The first was just prior to the United States entry into World War I. There was heavy demand for food and metals. The Farm Credit system and Extension Service were created during this time.

Commodity prices increased 34 percent increase from their previous low to the peak. The super cycle collapsed in the roaring 20s.

The next super cycle for agriculture occurred during the Korean War period of 1950 to 1957. There was a 47 percent increase in prices from the trough to the peak, Kohl said.

The third super cycle of the century was created by the U.S. government, he said, when a fellow named Earl Butz told farmers to plant fencerow to fencerow. Butz was President Nixon's secretary of agriculture. There was a 59 percent increase in prices from the previous low to the peak.

Land values had been steadily climbing since 1953. The prices spiked from 1972 to 1978 before Federal Reserve chairman Paul Volcker killed the dragon of inflation by raising interest rates and the bottom fell out of the land market.

It was only 10 years later that land values started creeping up again.

The current super cycle started in 2003. This super cycle impacts agriculture, oil and metals. More than 80 percent of farm expenses are connected to oil.

The numbers from this super sized super cycle are impressive.

Since 1995, the top 20 percent of producers have generated a 10 percent rate of return on assets, according to FINBIN data. Where else can a person legally generate that return, Kohl asks.

It's been more than a decade since the last system-wide downturn in agriculture.

This super cycle has been driven by world economic growth in emerging and growing nations, including China, Brazil, Russia, India, South Africa, Mexico, Turkey, Indonesia and South Korea. Other contributing factors include: The low value of the dollar, low interest rates, the biofuels mandate and minimal opportunity for investments.

About 10 percent of farmland sales are to outside investors, Kohl said. Another 30 percent is to 60 to 95 year olds who don't trust Wall Street. The other 60 percent of sales have been to other producers. More of that farmland is being purchased using equity for collateral, he said.

Kohl cautions farmers to be cautious during the good times so they can be courageous during the tough times.

There are four emotions in agriculture right now: Greed, anxiety, complacency and optimism. Eighty percent of economics is emotion, he said.

When he grew up in agriculture, older farmers drilled into him how bad things were in the 1930s. Most of today's farmers remember the 1980s and share cautionary tales with their children and younger farmers.

Farmers who are 30 have never experienced an agricultural downturn. For those who are 40, they were 10 when the last downturn occurred, Kohl said.

"The Curse of Wealth" has hit corn and soybean farmers who are getting too enamored with paper wealth. There are a lot of spoiled grandchildren in farm country and a lot of landlords who are getting too greedy.

He told of one landowner who was getting $500 an acre. He asked her why she needed that much rent. It gives her bragging rights at the nursing home, she told him.

While agriculture has been humming along, the 260 million Americans not involved in agriculture have seen their household income drop by 13 percent.

He fears that agricultural managers have become complacent, believing this super cycle will continue.

Plan for the extremes, keep debt in a modest range, have a risk management plan and a business plan. Set up a team of advisers. Follow the "Hut principle," which is hearing, understanding and taking action. Inaction is also an action, he said.

Great managers prioritize their priorities and shut out technology for two hours a day, listening to the silence.

Farmers are making too many decisions based off their tax returns rather than accrual adjusted records, he said.

Don't get caught in the normalization of deviation, believing that the good times will continue. When that happens, there will be a surprise and it will be ugly, Kohl said.

Instead, be ready. Have an exit strategy. Have working capital on hand — he suggests enough to pay your expenses for one month in the bank — and maintain a relationship with your lender.

The 34 percent increase in land values in Nebraska last year isn't sustainable.

"If it grows too fast, it's a weed," he said.

Agriculture is in the midst of an asset bubble and Worthington into northwest Iowa is the epicenter for a land value correction.

Mother Nature is still in control and she doesn't like what she's seeing this winter. Nebraska is so dry that it looks like Arizona.

The growth rate in emerging and developing countries also bears watching for signs of economic slowdown. Watch Germany, too, Kohl said. It's the worlds fourth-largest economy and elections are slated for September. Watch all of Europe, as that's China's biggest customer.

Be ready as finances could get upside down quickly, Kohl said.