Leading Economic Indicators for Agriculture
December 01, 2017
Featured Guest Writer: Dr. David Kohl
At the recent Graduate School of Banking at Colorado, one participant asked, “What are the top five leading economic indicators that we should follow for the agriculture industry?” Well, many variables are monitored for the general economy, which also impact agriculture, but let’s take a look at some indicators that specifically relate to the agricultural sector.
In capital-intensive industries that rely heavily on borrowed monies, such as agriculture, interest rate fluctuations and direction are critical to monitor. After nearly a decade of minimal movement, increases in today’s interest rates may shock the financials. For example, a movement from 5 to 6 percent is substantial when placed in percentage terms. And operating monies are often on variable rates, which are susceptible to rate hikes.
Value of the Dollar
Domestically, one in five dollars of net farm income is generated by agricultural exports. The value the U.S. dollar in comparison to the currencies of our major trading partners is critical to the bottom line. The policies of central banks around the world, economic growth and political and social stability are each key factors in driving the value of currency. In recent months, the value of the dollar has declined 10 to 15 percent, a positive for agriculture.
Gross Domestic Product (GDP)
The economic growth of the economies in America as well as abroad should also be monitored closely. Due to the current U.S. economic expansion period, an American agricultural business that is tied to the U.S. economy should watch economic growth and trends. In addition, the economic growth rates of the European Union, Canada, Mexico and Asia are significant to the export-driven commodities and products.
Many times, the prices of agricultural commodities are in line with oil prices, and a high percentage of farm and ranch expenses are linked to oil. Actually, previous domestic and global economic downturns have been linked to dramatic changes in oil prices. Of course, consumer spending, a driver of the U.S. economy, is linked behaviorally to petroleum prices as well.
While farm record databases may not be on your list of indicators, systems such as the state summaries and the FINBIN data out of University of Minnesota often provide early insight on the economic direction of agriculture. Separated by farm profitability, this information clearly highlights the practices of today’s leading managers. This well-analyzed information can assist in connecting the macroeconomic to the microeconomic factors for a full picture.
Of course, several other variables indicate economic direction, most of which impact agriculture in some way. Yet these foundational indicators develop a solid base from which to expand.
Please send your remarks to BMC@northwestfcs.com. I would like to know what you are thinking.
Dr. Kohl is Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship in the Department of Agricultural and Applied Economics at Virginia Polytechnic Institute and State University. Dr. Kohl has traveled over 8 million miles throughout his professional career and has conducted more than 6,000 workshops and seminars for agricultural groups such as bankers, Farm Credit, FSA, and regulators, as well as producer and agribusiness groups. He has published four books and over 1,300 articles on financial and business-related topics in journals, extension, and other popular publications.
© Northwest Farm Credit Services 2017
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