The big-picture issues have the ability to throw a major wrench in your five-year planning. Here’s what to know.
How do you put together a credible five-year business plan given the monumental changes — record droughts, sky-high land values and huge export growth — of the last two years?
Terry Barr, senior director of industry research at CoBank, provided some guidance at the USDA’s Agricultural Outlook Conference in Arlington, Va., last month. The problem with any projection, as Barr pointed out, is separating short-term variations from long-term trends to produce a "new normal." Here are 8 key drivers that Barr thinks should drive a 5-year plan.
1. Assume declining federal ag support
The USDA’s projection for 2013 net farm income, for instance, assumes current agricultural subsidies will continue. But the likelihood, based on last year’s House and Senate farm bills is that the federal safety net will switch from direct subsidies to insurance.
And, that won’t be the only change over the next five years.
"Sequestration is only the first step in what’s likely to be a series of budget cuts," said Barr, noting that Congress will likely need to reduce revenue each year. "We may replace direct subsidies with insurance in the farm bill this year. But the next time around they will look to cut insurance payments."
2. Demand from ethanol producers may fall
U.S. energy policy currently favors the production of ethanol from corn as a hedge against foreign oil imports. But as the U.S. produces more oil and natural gas, energy prices are likely to fall. The International Energy Agency recently predicted that the U.S. will overtake Russia and Saudi Arabia as the world’s top oil producer by 2017. That will reduce the country’s dependence on foreign oil and presumably its need to conserve.
"We may have declining energy prices in the future. We need to re-examine energy policy; there could be massive structural change. Biofuels and renewables may not grow as fast as they have been growing. What are the implications for fertilizer companies? No one knows."
3. Global demand will shift
Developed countries, of course, aren’t the driving force behind U.S. ag export growth anymore.
Farmers have benefited in recent years from export growth fueled by an emerging middle class in developing countries. But the key driver for agriculture will be how many people escape poverty, not the size of the middle class cohort.
"That’s when people change their diets," said Barr, adding that once people achieve a middle-class wage, they may spend more on transportation. Also, as many developing countries continue to grow, they tend to replace meat imports with domestically produced meat. China and India, Barr noted, will account for 70% of the increase in the middle class from 2000 to 2030.
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