Long-term Optimism

February 6, 2009 09:36 AM

Even as Wall Street firms and grain markets crashed, ag bankers at their annual meeting in November were long-term optimists about agriculture, though concerned about how current events could affect related industries like ethanol.

Agriculture can't escape the national economic blaze, warned Michael Swanson, Wells Fargo chief economist. "This is the worst we've seen it in three decades, and ag isn't immune. We are in a recession, which typically last three to five quarters. Long-term, I'm bullish on agriculture. Productivity and technology don't stand still. How do we get from the short term to the long term?"

Even in the long term, he believes, there will still be some instability. "We're going to see more economic volatility and the real cost of money get more expensive," he explained at the gathering. "People will pay less for assets. Do you think land is immune to that? I don't think so."

World currency markets could impact agriculture as well, Swanson said. "You can import Brazilian ethanol and make money, even paying your tariff on it," he said.

"In the long term, productivity and technology allow us to do more R&D," Swanson said. "That will drive growth for food, energy and other things."

False economy. Dave Kohl, ag and applied economics professor emeritus at Virginia Tech University, sees big changes in how people live. "Here's what I see coming: an extended period of economic moderation where we will see volatility at the extremes. But we're going to have periods of calm. It will make us reprioritize our business, family and personal decisions. For the past 25 years, we've been living off the wealth effect, off paper money," he said.

"I think what we have here is recession light. The typical recession lasts 11 months," Kohl said. "I see it more like the recessions of 1973–1974 and 1980–1981: stagflation in the short run and deflation in the long run."

Interest rates concern Kohl most. "Debt is being financed by more foreign capital. Should China, Canada and Germany decide to keep their money home, is that going to continue to put us in bad shape?"

Consolidation. Mark Lakers, president of Ag and Food Associates, an Omaha, Neb., middle-market merger and acquisitions investment bank, anticipates rapid ethanol consolidation, with companies owning plants with less debt buying the mostly newer but more debt-ridden facilities. They will get good deals, Lakers said, with 50-million-gallon yearly capacity plants selling for as little as $1.50/gal. By comparison, new-plant construction cost $2.20/gal.

"You have 25% to 30% of the industry desperately looking for new lenders at a time you probably don't want to be doing that," Lakers said. "It will cause some of these plants to change hands.

"They'll be selling at a 25% discount to what the plants cost to build, a reduction from a premium of $2/gal. Over the next three to five years, we'll go from 150 ethanol producers to 25 to 50. It could be faster. The good thing is, it should be an orderly process. There should not be a lot of disruption," Lakers said.

To contact Charles Johnson, e-mail CJohnson@farmjournal.com.

Top Producer, February 2009

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