Joe Kerns – Planning for Post-Pandemic Success in Ag
What is the future of the agriculture industry after a tumultuous year? Joe Kerns, managing director of Kerns and Associates, discusses the ways the food supply chain adapted over 2020, ways farmers must be agile to succeed today and what agri-food trends to look for moving forward into 2021.
Tom: What is the future of the agriculture industry once the world has emerged from the coronavirus pandemic? What should farmers and producers be thinking about now as they plan for post-pandemic success? We're taking these questions to risk management consultant Joe Kerns, joining us from Ames, Iowa. Joe and his team at Kerns and Associates work with livestock producers and suppliers in 13 states. The clients include packers, producers, veterinarians, researchers, mill operators and feed ingredient suppliers. Joe, thanks for joining us.
Joe: Wonderful to be here. Thanks for having me.
Tom: And what a year it's been, Joe. What makes your shortlist of trends and dynamics that you've been watching as agriculture has navigated this pandemic?
Joe: Some of the things — and I think this is kind of important, is to segregate out what was going to be a trend versus what are the shock waves that were sent to the market. And we have a tendency to lump all those together when there's an acute issue. And so, a few of them that I think that we can start to identify that are directly impacted by the pandemic are lack of travel, for instance. Certainly, that the fuel consumption is down, which impacts agriculture. With the lack of ethanol demand, it also puts fewer DDGs on the market. And so, there's some unintended consequences that are kind of the substrate of the initial event that I think are perhaps the most interesting here, whether that, if you're working from home, that we more than likely probably would not have been, but even a “ghost kitchen” is perhaps a trend that was already going to establish itself and then hits kind of the turbocharger in a pandemic environment. It’s made for some very interesting dynamics.
Tom: Joe, I’d like to read something from your website and then we can talk about it. You write, “The turning of the calendar is the traditional time to take an inventory of your personal situation and commit to stirring in another direction, if you so choose. Statistics show, however, that you will probably revert back to the same old habits before February. Change can be hard.” Indeed it can, but have the economic shocks of the pandemic brought about any long-term changes that need to be recognized?
Joe: Absolutely. And certainly, I would call (it) a shift toward even environmental stewardship. The pandemic, in another, I think, ancillary form, has brought together some of the political unrest that we’ve seen. As folks have stayed at home more, I think we've got an acute situation that we’re dealing with in a congressional issue that’s brought through funding. It’s brought through some economic strife. And it’s turned the political thing, it's turned up the heat. And our fishers in society are more exposed. I think that once these things are exposed, the genie doesn't go back in the bottle very well. Kind of even what you (read) had kind of a qualifier in there that we can change if we choose, but it is our choice. So, some things are posed upon us and other things are (our) choosing. And I think what I was really getting at, probably, in that article was dealing with New Year's resolutions specifically, and everybody has (them) — you know, “I'm going to eat better. I'm going to lose weight.” Well, that’s fantastic. But unless we say, “I’m going to run a 10K in less than 40 minutes” — those are specific deliverables that I think are the ones that we need to choose, not the type of generalities that aren’t so inflection-performing.
Tom: Well, speaking of New Year's resolutions, you also wrote near the end of 2020 that there's nothing inherently wrong with New Year's resolutions if they are “bends in behavior,” not wholesale changes unlikely to stick. It sounds like — to me, anyway — that you're suggesting that it's better to make modest, moderate changes than to go off in an entirely new direction. Am I reading you right there?
Joe: Absolutely. Yeah. The radical seldom works. You know, whatever you see in yourself or in others as a trait that needs to be changed, making a polar opposite (change) is rarely successful; it puts too much stress on the rest of our system. We’re dynamic beings. And more than likely, the item that you identify is connected to a lot more behaviors. And so, therefore, having a complete denial of all the desserts probably is a little too radical. Having them once a week is perhaps a more realistic metaphor. And I think, even in our businesses, that we've got to recognize the same. That if we’re referencing the pandemic that has imposed onto us some very, very acute dynamics — they might be financial, they might be employment-wise — even our asset base is going to be utilized.
You know, thank goodness I don't own any hotels or any commercial buildings, per se, because I do think some of the long-term changes that we're going to see in society are going to render those to be of less value than they were prior to the pandemic coming. So, kind of keeping with that theme, if we get to choose them — and certainly, the resolution component is self-imposed — bends work a lot better than 90-degree angles or about-faces.
Tom: Well, we're talking about change, and we each can be stuck in our ways, but I wonder if it's really important to think about that and to try to be more agile in these times to come out of the pandemic successfully. And what does that agility look like?
Joe: Well, certainly, I think the first rules of business are: don't run out of cash. If we say that three times, it’s kind of neat to write a book about that. And I do think that having liquidity and solvency is the first key component. The second would be the frank assessment of any fixed assets that you have and what their shelf life is in the current industry, whether it's within agriculture — that if I've got a pig barn, can it be converted and utilized (as) something else? And if so, what is the net present value of that asset? And so, I am personally a fan of not owning a whole lot of fixed assets, (and) I do think our society is also moving that direction.
I am not a millennial generation, but the millennials, I think, have taught us something: that they would rather rent than own in many different cases. And that does add a level of agility — that until we get things kind of sorted out and our oscillation decreases a little bit so we’ve got more confidence in our decision making, it is important just to be a little lighter on our feet and less encumbered, perhaps, with physical assets than at other times, (when) it might warrant those, in an inflationary environment — which I also think is coming, by the way.
Tom: Let’s kind of riff on that rental idea, because I agree with you that it seems to be really catching on, and I wonder if it could be seen as kind of a win-win situation, since you're not saddled with maintaining all that gear, all that equipment, but at the same time, somebody else is given the business.
Joe: Yeah. The win-win has got to be a fair return towards the equity holder. And when we were in a zero-interest-rate environment, that's probably very difficult. And again, getting back to the political scenario that we’re coming on with a little bit more debt, the changes in the Georgia (senate) race that, more than likely, are going to allow a few more progressive programs to roll through, that will inevitably increase our tax base, perhaps lead into some inflation, is that there's a secondary alternative for money. Look at the stock market. We're what, 31,000? I don't know what it did today; I think it was up a little bit also. But the Dow Jones is also giving a very clear indication that there's more to an alternative than money sitting on the sidelines. And the type of scenario that I think we're going to be in for at least for the (next) two and, more than likely, the next four years is going to be one of alternative value, bringing money off of the sidelines and making it work. We're going to punish the savers as a society. And so, from an agricultural standpoint, I believe what that means is that rates are going to have to move higher in order to compensate the next best alternative for the allocation of funds. And so, what was an easy scenario in a zero-inflation-rate environment — to say, “Why would I want to own it? I can just rent it” — I do believe that those dynamics are going to change, but we also have generational changes that are overlaying. So, it’s almost like waves that are coming together, and you’re trying to decide which one's going to be the dominant force, or are they going to conjoin to really bring some kinetic energy into a program?
Tom: What are some key markers in the market that you're watching for as risk-management decisions are being considered and made?
Joe: Well, certainly, profit margins. I think that's what — we've got to start from a sound economic base. If I'm making decisions that are leading to profits to my operation — and again, this comes back to the “What is the return on my asset base?” and “Am I better off selling it and doing something else with my money?”
We, in agriculture, tend to look at these things with our hearts a little bit more than our heads at times. And I think that's one of the beauties of agriculture, is we're not just complacent and cold, steely players on a Monopoly board where we don't care what we get. We care. You know, it's the model of the entire pork industry. And so, I think that, certainly, the profit margins and then, kind of reverting back to stuff we talked about earlier, was segregating out what are the short-term changes versus the long-term changes, and how do I position my operation, and am I willing to ride out a storm? If that's what I'm looking at — and are there alternatives, and I’ll give you just a brief example. The financing alternative is we, in the United States, have a very robust farm credit system and, also, a private lending system to access funds. Not everybody has that. If you spend any time in China, it's either going to be private equity or you're going to become a state-owned enterprise. Those are really your two choices. There is no farm credit system inside of China. And so, in addition to what we already have as financing arms, we're also starting to get a little bit more creative. The over-the-counter market — some nontraditional sources of capital are coming to agriculture. And I think as long as we are open to the consideration and not say, “I'm going to do business with this bank because my grandpa did business with the bank,” we're going to be better off. There are going to be wonderful financial opportunities that come at us that, more than likely, have a few pitfalls, but I'm very optimistic of our ability and, something else we talked about, our agility and our ability to adjust.
Tom: Joe, there were errors in the June hogs and pig report back when COVID was forcing plant closures, and then again, in September, mistakes were made. Is the industry now stabilizing, and was that indicated in the December report?
Joe: I still think we’re on a little bit of a wobble. I think it's easy to look at the USDA in the September and June report and go, “Oh, my goodness, they were wrong.” And they were, but they had an impossible task at their avail. The COVID, with the backup of the animals and the suppression of plant lines, meant that we had to make some very difficult decisions on the farm, and decisions that nobody wanted to talk about nor publicize, for obvious reasons. Because of that, there was no way that we were going to quote “find” where are the missing animals on the farm. Where did they go? And so, to place any reliance on those reports was probably a little bit of a misgiving to begin with, but we were looking for anything to glob onto. And USDA comes out every quarter with the hogs and pigs report. And traditionally, we've been able to kind of hang our hat on those, to some degree of confidence, and we were looking for that. In our floundering, we're saying, “Finally, I get something to hold onto,” without the recognition, perhaps, fully, that it was not moored to anything either. It was floating along with us.
The September report completely overstated the heavyweight category. That's a good thing. That's a good thing. We would have been in a world of hurt otherwise. The current report also indicates that we've got some heavyweight animals that might be a little suppressive to the market. And I believe that by the time we're set and done, we’re going to find out that that wasn't quite accurate either. Now, our oscillations are lessening. And so, whatever deviation that we might have isn’t as bad as the previous report. So, I do think that we're starting to get back onto some solid footing. I would take a look at the March hogs and pigs report as being kind of the finding where we can put a stake in the ground and say, “Okay, I can lean against this one.”
Tom: Okay. Let's turn to grains. You've expressed concern that pork producers may have a difficult time sourcing soybean meal in the summer unless something changes radically in the South American weather forecast. First, tell us about that forecast.
Joe: Well, the forecast has been one of a La Niña scenario that has traditionally hampered the production inside of South America. We've got two different pieces here moving at the same time. So, one is: what is our South America forecast, and what do world supplies look at? The second one is: has the United States been leaned on just a little too long in order to supply products in the world, and now, we are going to short ourselves? That's, I think, a very real scenario. So, it's not only quantity; it's also timing.
So, the Brazilian crop did not get in early. We need the Brazilians to perform, as far as supplying crop to the world, and it starts in earnest in the next 30 days or so, traditionally. I have no reason to think it's going to be much different. But the United States has been the supplier of choice to the world. China's appetite has been voracious.
I think we've got a very real risk of a repeat of the scenario that we saw in 2013, where the only way that a producer was to receive soybean meal was to deliver a load of soybeans to the plant. I think we are, perhaps, (experiencing) as acute of a scenario as we were back in 2013, and that will tease itself out. We've got a report coming out on Jan. 12 that would give us final production for 2020, as well as the stocks report. And of the two of them, strangely enough, if you can only give me one, I’d take the stocks report. Let's figure out where the supplies are, and let's figure out if we've got enough time in order to parse those out until we can get to our next harvest.
Tom: Well, what would be the consequences if the U.S. is pressed to supply a larger-than-expected portion of the world's soybeans?
Joe: Well, the consequence is that we physically run ourselves out. That if I gave you half a tank of fuel and said, “Now, if you drive it at 50 miles an hour, you could make it,” and you go, “50? I'm just going to put my foot to the floor,” and you'll make it three-quarters of the way there and the tank runs dry. And that's kind of the analogy that we're on right now, is we’ve had our foot to the floor not only supplying to crush industry for domestic use, but also, we've been exporting the living daylights out of beans, figuring that we’ll worry about tomorrow tomorrow. And I think that we are on a collision course with reality, especially if we see more world demand, margins are offered.
We live in a free-market economy. We could do whatever we want. We don't have to play in. That's the job of the market, is to move prices to a level that ration the disappearance. That’s what we call demand. So, that’s the job of the market, not of any one central government agency. And I think that's the beauty of what we have in agriculture.
Tom: Joe, you've also raised the concern that an acreage battle is brewing as we come into spring. Tell us about that.
Joe: Sure. More than likely, we're going to be adding someplace in the neighborhood of 8 million acres to our primary crops, corn and soybeans. If the pricing relationship remains where it is right now, our internal models would say that of those, of 7 or 8 million acres, the lion’s share are going to go beans and corn, (which) is going to have a difficult time just holding service. And that's because the soy market has been the leader so far in, and new-crop soybean is just the relationship that, if it was a traditional 2.3-to-1 relationship and taken at $11.50 November beans and say, “Well, what does corn to trade at?” You're going to find out it's $5 to make all those ratios start to come together. And when corn is trading at $4.35 or so in December, we've got some ground to make up. We've got some ground to make up between now and our planting decisions in order to encourage those acres so we don't find ourselves in a stress situation in 2021 with corn. We’re already there with soybeans.
We’re going to be in a strain in 2021 throughout the use year. The job of the market is going to be to encourage enough acres to make sure that 2022 doesn't look the same for corn — the exports, the feeding demand, but more importantly, it’s the acres that we put into the ground and, then, the subsequent yield.
Tom: You have described an ominous situation in hog futures, the case of the shrinking open interest. Can you elaborate on that and why (it is so) ominous?
Joe: Oh. Well, the ominous part of it is, as pork producers, if we wish to hedge — and that is, to sell the market — you've got to have a party willing to offset that hedge — i.e., a buyer. And when the funds are not participatory, especially getting off some hedges into 6, 8, 10, forward (movement) can be difficult. We tend to have a lot of activity in the market in the front months, but the back months — where forward-looking risk management might be prudent — the lack of fun and participation does cause a very, very real concern.
I'm happy to report (that), in the last two weeks, we have seen the funds finally starting to participate. They’ve come through in spades so far in the wheat market and, then, in the soy complex and, more recently, the corn, but the livestock side of it has been kind of almost forgotten in this “go, go buy” scenario. And so, the lack of participants in the market — not everybody thinks like us, and that's a good thing, because we have to have somebody take the other side of our traits.
Tom: A little bit ago, you touched on the new administration in Washington, and I'd like to kind of elaborate on one thing regarding it, and that is that the Biden administration has inherited the Trump administration's trade and foreign policies. China: what now happens between the U.S. and China?
Joe: I suspect that we're going to start off with, perhaps, no change whatsoever. The phase-one commitments that were negotiated more than likely had enough economic parameters — i.e., China needed our stuff, whether it's soy or hogs, given their ASF position — that the buying was going to occur with or without an agreement.
I do believe a, perhaps, more tender approach and respectful approach to the Chinese situation by the next administration could certainly yield more opportunities for agriculture, more opportunities for commerce that would flow back and forth — more of a dovish approach rather than the hawkish negotiating style that we had engaged in. And I'm not saying it was all bad for the United States. It is, perhaps, for (the) telecommunication component and some of the national security pieces, were, perhaps, were of benefit. Agriculture, in my opinion, was hard. It was kind of the tale of the dog when it came to the negotiating table.
We recently had an episode where we had an in-person visit with Gregg Doud, and all of us in agriculture need to thank that gentleman for his participation in bringing our interests to the negotiating table and putting the provisions in that have allowed us to kind of enjoy some of this largesse that’s been flowing through right now. But I suspect the next administration could even be more successful, now that we've laid the groundwork — and perhaps if agriculture takes a more front seat, if you will, in the negotiations, in attempting to help the Chinese people bridge some of the difficulty that they've had with ASF and other production difficulties, that we could see a win-win scenario. That's something that, for the last four years, I don't think has been the goal. “If you win, that’s okay, but I’m going to make sure that I win” seems to have been a more prevalent attitude.
Tom: Any other signals that you're now reading or watching for as our economy continues to weather this pandemic and undergo the changes that come with shifting political winds in Washington?
Joe: Certainly, inflation is probably my biggest concern, and that is a double-edged sword. We are going to encourage money out of passbook savings. Savers, I think, will be not as well-rewarded. And if you take a look at some of our folks living on a fixed income, this is kind of a dichotomy. We might be hurting the older generation that, traditionally, our policies in a democratic type of approach would say that we're going to be a bit more protective of, whether it's the geriatric community and/or the environment. And the economic policy, I don't think, is going to be supportive of those living on a fixed income.
Conversely, if somebody's going to have to pay for this debt — and the “tax the rich” piece is very, very difficult — (then) the next generation is more than likely going to carry much of the burden. So, inflationary pressures, I think, our one of my main concerns that we’ve got rolling forward here — keeping the political tensions at bay.
Understand that, as Americans, we all have a vested interest. And you know, if you've traveled abroad whatsoever, there's a feeling, when you come back to the United States and make it through Customs, that you’re happy to be home, because with all of our warts and our scars, there’s still no place I'd rather be. There are some beautiful areas of the world. But from an opportunity standpoint and a safety standpoint, we still aren't the greatest nation, and I still hold out hope every day that we're going to survive — not only survive, but also thrive as a nation.
Tom: I certainly can't disagree with that, Joe. Risk management consultant Joe Kerns joining us from Ames, Iowa. We thank you so much.
Joe: Thanks for having me today.