What's Your Next Move

Featured in the September issue of our magazine.

Strong chess players know they can’t just figure out their next
move on the fly. They have to look at several possible moves with
different pieces on the board to determine which might increase
their chance of winning. Such forward-thinking strategy may win
the match.

The same philosophy can be applied to the global outlook for
agriculture. Uncertainty on a broad range of issues is clouding
the capability to confidently map out exactly the right moves. But
the solution, say several industry prognosticators, is to become
informed and ready to respond.

The Purdue University Ag Economy Barometer Index confirms
this uncertainty. The index is based on a nationwide survey of
400 U.S. producers each month. When asked to look ahead five
years, the percentage of producers expecting good times declined
from 51 percent in May to 45 percent in June. Those expecting bad
times fell from 38 percent in May to 31 percent in June.

Index coordinators conclude these results reveal the biggest shift
was away from answering good or bad to responding neutral,
suggesting a rise in uncertainty about the U.S. agriculture outlook.
Multiple factors are at play amid this uncertainty. Brook
Cunningham, managing director for Lazard’s Global Agribusiness
and Nutrition practice, points to new input and on-farm
technologies that continue to increase global crop supplies, fewer
periods of major supply disruption and more fluid information
flow as ceiling forces for crop prices. She also cites the likelihood
of further industry consolidation across the agribusiness value
chain via global mergers and acquisitions, all with the objective
of creating bigger, more global and lower cost companies that are
better able to serve producers, customers and shareholders.

GLOBAL TRADE SHIFT

Perhaps the most dominant factor affecting agriculture is world
trade. Outside American borders, Bill Lapp, president, Advanced
Economic Solutions, warns trade uncertainty causes exporters to
think twice about sending ships across the ocean in case there is
no market when they arrive.

“Remember in 1972, President Nixon canceled U.S. soybean
sales to Japan, and Brazil rose to become a major world player.
We could see a new soybean producer come into the marketplace
if trade uncertainty persists. Or we may see a ‘Ukraine’ produce
more canola,” he says. “Buyers may build up soybean inventories
at lower prices and shift global consumption patterns.”

Darci Vetter, general manager for public affairs and vice chair for
agriculture, food and trade at Edelman, says a trade war influences
more than current goods and flows movement. She believes ripple
effects of trade disputes will only be amplified — input costs will
rise and other countries may retaliate against soybeans, meat and
seafood. She also predicts tariffs will drive investment in Brazil and
Argentina agriculture, as U.S. producers put expansion and
investment on hold.

She also notes new trade agreements are “going gangbusters”
everywhere else. The European Union is making serious inroads
that will put the U.S. at a competitive disadvantage.

Barry Flinchbaugh, Kansas State University renowned ag policy
expert, agrees lost markets in China, Canada, Mexico and Europe
will be bad news. He predicts if other buyers step up to take
advantage of lower prices, it will not be an even tradeoff.

“It will get even worse if the president pulls the plug on NAFTA,”
says Flinchbaugh. “The president does not want to compromise
and use multi-lateral agreements. Farmers will suffer, as bilateral
agreements historically do not give farmers a good shake. The
policy is not going to work and repercussions will be serious. We
will lose some farmers along the way and consumers will have to
pay up. No one ever wins in a trade war, although I don’t believe
this will last.”

China will remain the big gorilla in the demand equation. “To
put the importance of China in perspective, they import in one
month equal to 54 percent of the Illinois soybean crop on some 160
ships. Their demand is unrelenting and their livestock production
sophistication and protein consumption means they have to be in
the market every day to get all they need,” says Lapp.

LOCAL NEXT MOVE CONSIDERATIONS

So how can Illinois soybean producers adjust and prepare for
the future? Rob Dongoski, partner, agribusiness, Ernst & Young,
believes producer needs are shifting. Profit and risk will drive the
future, as insurance companies see opportunities, for example,
and bankers rethink their models.

“We will have to put more money in farmers’ pockets by making
them more profitable through advancements in innovation and
technology. That is not negotiable,” he says.

Technology adoption is critical to advancing producers.
Cunningham says the digitization of agriculture is racing to catch
up with other industries with massive investments by strategic
and financial investors across a wide range of technologies.

“We are reaching an inflection point in ag tech adoption.
Farmers willing to try new technologies are at the point where
we were on smartphone adoption 10 years ago. Lack of
integration between company products to form easily usable
solutions, as well as insufficient proof of the value thesis for
growers has slowed adoption in many instances. But we are seeing
meaningful progress. It is a matter of ‘when’ instead of ‘if’ we will
reach critical mass,” she says.

Don Bierman, CEO of Crop IMS, who also serves on the
Agricultural Data Coalition board, sees both good and bad
coming from technology’s data collection and use.

“The processes are getting simpler, cheaper and faster. In
agriculture, we see a surge to do everything in a rush to create
convenience with technology. But there are tradeoffs,” he says.

While data collection is easy and automatic, Bierman says
producers do not see the benefit. Instead, data are racing to
advertising agencies and other vendors who extract an economic
advantage from it. IoT, sensors and other technology will only
multiply the challenges.

“Right now, vendors take and glean what they want from data.
They are monetizing it, not always collecting it with the best
interest of farmers at heart,” he says. “This will continue and we
will need to determine how to make data an integral part of how
farmers profit.”

Adds Cunningham, “People are willing to take the risk if they
see value, but it will likely reach a point where farmers will want
something for their data and not be willing to give it away.”

Online platforms also are providing greater optionality for
producer access to market data and input purchases. Cunningham
says such entities could allow farmers to bypass the traditional
retail chain in some instances and go directly to ag marketplaces
which can bring value to producers in a new way. It is unlikely
traditional retail channels will ever be fully replaced.

“We will likely see more consolidation among lower tier
companies and mergers driven by a desire to have greater scale and
deliver more fulsome product and service portfolios to producers.
Every ag company will be under more pressure to deliver integrated
solutions,” she says, although there is no replacement for personal
relationships and advice.

And while changes in trade and technology swirl around Illinois
soybean producers, the bottom line is that soybean demand
continues to outstrip annual growth in U.S. soybean yields, says
Lapp, resulting in the need for two million more acres of soybeans
planted each year.

“Somewhere in the world, we will still need to produce more
soybeans. The U.S. may lose market share or we may see 95 million
acres of soybeans and 85 million of corn,” says Lapp.