Fiat/Agriculture
Observation of our economic situation over the last year or two reveals a number of lessons about how globally inter-related businesses are. Among the big news items of today is confirmation of what has been suspicioned for awhile - Chrysler Corporation is going to file for bankruptcy, in conjunction with some form of takover deal by Fiat. On the surface, I wasn’t aware of a linkage to agriculture, but according to The Kiplinger Agriculture Letter, April 24, 2009, this Fiat takeover may actually drive discounts on farm equipment. Fiat is owned by CNH Global, which is also the parent company of Case IH and New Holland. Having been apparently flush with cash, Fiat loaned $5.2 billion to CNH, a pretty hefty loan to any parent! The thinking is that Fiat could now use that cash to develop the Chrysler business, and CNH may discount farm equipment to speed up sales to fund repayment of the loan. That would likely affect the entire equipment industry, a welcome prospect for producers.
Better Bad News
In support of Fed Chairman Ben Bernanke’s “green shoots” quote, indicating that there are signs of new life in the general economy, the Wall Street Journal has an editorial today with this title. The general economic picture is still bleak, but less bleak, in other words. This comes after a 6.1% drop in GDP in the first quarter of 2009, but indications are that business inventories are dropping, consumer spending is rising, and disposable income with it (in spite of unemployment that has not yet topped). Furthermore, the S&P 500 gained more in April than any month in the last nine years. While the Fed left the federal funds interest rate unchanged yesterday, the WSJ contends that it is time to turn to concerns about inflation, which will require raising that rate: “But sooner rather than later, the Fed needs to start taking its gusher of liquidity out of the economy.”
Local Foods
Just the term “local foods” is enough to stir some pretty strong feelings, not least among those in production agriculture. Prominent new gardens, such as those at the White House and at USDA in Washington, have received a lot of attention, including both scorn and praise. I tend to feel positive about them, in part because I enjoy gardening and in part because even if only symbolic, drawing attention to food production can’t be bad for an industry that is all about food production. The difficulty comes when the promotion of smaller-scale local food production is perceived as an attack on larger-scale commercial agricultural production. I’m not convinced that we can’t all be enthused about the growth and success of both, and that the agriculture industry as a whole won’t be better for it.
This brings me to a thought I’ve been rolling around for awhile and so was surprised to see recently in The Hutchinson News newspaper (4/20). The article opens “The future of food in Kansas just might include a nod in the direction of the state’s agricultural past. Some state officials see a growing demand for locally grown fruits and vegetable, pervasive nearly a century ago, as an economic opportunity for the state once more.” I’ve been reading too about water shortages in the central valley of California, where I used to live and where incredible acreages of fruits, nuts and vegetables are grown to feed the world. Certainly it won’t be for everyone, but is there a place here in the heartland to explore more “non-traditional” crops and respond to what is clearly a growing trend among consumers? Rhonda Janke, of K-State, made a presentation to the KS Senate Ag Committee on this very subject, and I found some of her statistics intriguing. “While Kansans spend $525 million every year on fruits and vegetables, Janke estimated Kansas farm income for such produce is only about $16 million.” In contrast, according to Janke, Kansas produces enough wheat each year to feed the entire state for 43 years. And cattle, enough for 17 years.
I picked up on the economic principle of comparative advantage in ag econ, which supports specialized production and free trade. And I’m not suggesting we’ll see wholesale changes to our crop mix in the High Plains, or Kansas bananas any time soon. But at the same time, given the rapid and dramatic changes in food production and consumption across the nation and world, it might be worth exploring just what our comparative advantages really are today. I used to live in Modesto, CA and have driven past the homes, headquarters, and vineyards of Ernest and Julio Gallo perhaps hundreds of times. So I found it quite a surprise recently to find that before 1920, over 80% of the wine produced in the United States came from Kansas and Missouri. Perhaps in future years we’ll see some West Coast production moving back to the High Plains, not in gardens, but as serious and significant commercial endeavors.
Vilsack/USDA
The Secretary of Agriculture had a teleconference yesterday to mark the 100 day milestone of the administration, as it relates to USDA. Vilsack noted $28 billion in stimulus funds that USDA is “pumping into rural America to create jobs and offset the recession”, according to Agri-Pulse. As noteworthy as his comments regarding stimulus dollars were those about cuts and efficiencies. Specifically, regarding farm progam payments, Vilsack noted “We’re collaborating with the Department of Treasury to identify potential fraud and improper payments in farm programs. A report from the U.S. Government Accounting Office showed that between 2003 and 2006, USDA may have made more than $49 million in payments to ineligible recipients. Savings under this proposal could reach up to $16 million annually. We’ve also proposed changes in farm programs and we’re pushing for overall reform of the Federal Crop Insurance program.”
Feedyard Insights
Kennedy and Coe, LLC’s Feedyard specialty group has published a series of six monthly articles this year directed especially to the cattle feeding industry, but with some business management insights that are relevant anywhere. The emphasis has been on ideas to implement that will strengthen a business during a downturn, as well as prepare it for greater success in a future rebound. Those articles can be found on the Press page of Kennedy and Coe, LLC’s website. http://www.kcoe.com/press.php
Given that the Kentucky Derby is this weekend, and that the contents of the 2008 farm bill are still being implemented, one component of note is that racehorses placed in service from 2009 through 2013 can be depreciated over three years, rather than seven. So if you’ve found the next Seabiscuit, you can accelerate the writeoff of his purchase. On the other hand, if it is Seabiscuit you’ve found you don’t have a lot to depreciate anyway, and it will be more than three years until he hits his stride.
Written/edited by Greg Wolf, Agriculture Group, Kennedy and Coe, LLC
