Agriculture’s Place In A Down Economy

Agriculture's Place In A Down Economy

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For the past few years, the world has suffered some of the most difficult times since the Great Depression. Through it all, Dr. David Kohl, professor emeritus of economics at Virginia Tech University, has monitored the situation and says agriculture could be an engine to drive recovery.

“Improvement of the U.S. economy will require a balance of budget trimming and incremental tax changes at all government levels,” says Kohl. “Incentives and support for small business growth will be critical. Accountability in personal and business finances and our educational process, with emphasis on students who are ‘lifetime learners’ will need to be employed. Infrastructure upgrades to build efficiency and growth in our economy must be a long-term strategy. Agriculture can provide an engine of growth, producing food, fiber, fuel, products for the growing life sciences field, and life experiences.”

Debt And Inflation

The media has been full of headlines decrying the massive federal debt that the U.S. holds. According to Kohl, it could be worse, but it is certainly an issue that the nation must face to avoid larger economic difficulties in the future.
“Our federal debt level is 92% of GDP. PIIGS (Portugal, Italy, Ireland, Greece, and Spain) generally have debt to GDP levels above 100% in many instances,” he explains. “Of course, these countries have been rescued by Germany and France as they attempt to restructure their economies by cutting spending and reducing entitlements. “The U.S. federal debt, of which 40% is financed by foreign economies, is at a critical level to impede economic growth,” Kohl continues. “Recent economic papers have concluded that when federal debt exceeds 90% of GDP, it reduces economic growth of the country by one percentage point. This may be one of the reasons why the economy is growing at an anemic 2% instead of the ideal growth of 3% to 3.5%.”
 
In an attempt to encourage economic growth, the Federal Reserve has been pumping cash into the economy by a mechanism called quantitative easing (QE). This is a process in which the reserve buys U.S. treasuries in an attempt to get others to invest in equities and asset-based investments. Recently, the Fed committed to spend $600 billion in a second round of easing or QE2. This was meant to stimulate the economy, but set off inflation alarm bells for some. “QE2 is meant encourage the wealth effect, which is when people feel wealthier through increased stock, real estate, and investment values, they tend to spend more,” say Kohl. “Since consumption accounts for 72% of our economy, the wealth effect has a major impact. A secondary component of QE2 was to devalue the dollar to encourage exports to grow the economy.”
Kohl says, the effect easing has had on inflation probably won’t cause inflation for the entire economy. “However, it is creating local and regional land value bubbles in certain sections of the Midwest and other parts of the economy related to food, fiber, and fuel. Watch for QE3 and beyond, if the economy does not rebalance. That is when inflation concerns become front and center.”

Ag Models For Success

Kohl recounts a recent speech by Walter Robb, founder of Whole Foods Market, which targets natural, local, and organic producers. In his speech, he touted the benefits of this approach, he added that modern agriculture will play a key role in feeding a hungry world. “Yes, the traditional agricultural producer will still have a place,” Kohl says of Robb’s comments. “This segment will focus on innovative efficiencies, modest growth and debt levels, and living withdrawals. Possible use of non-farm income or business revenue may be used, consistent with grower value systems and needs. The large, complex family business, linking with agribusiness, will be a major player as well. This model will require astute business acumen and strategies consistent with consumer trends, governed by evolving regulatory changes that could be challenging at times.”