Nate Franzen: Could ag be the next economic boom?
February 7, 2011
In the 1990s, the U.S. had an economic surge unlike any other. The Silicon Valley located in California is generally considered to have been the center of the dot-com bubble, which propelled the use of Internet technology across the country. The valley is known around the world as nation’s biggest high-tech manufacturing center in the U.S.
Nate Franzen, agri-business division manager for First Dakota National Bank in Mitchell, SD has creatively coined the Midwest’s booming agriculture sector as the next “Silicon Prairie,” and at the annual Agrivisions 2011 event held on Jan. 25, 2011. He asked the crowd, “Could agriculture be the next economic boom? Could it be Silicon Prairie?”
Franzen certainly thinks so, and he explained the many factors that could contribute to the success of farmers and ranchers in the future. One of the first considerations is the growing world population and the increased demand for food around the world.
“We currently have a global population of 6.8 billion people,” said Franzen. “In the next 50 years we will add another 3 billion people. The largest areas to see growth will be Brazil, Russia, India and China (BRIC).”
He added that this population growth will escalate the need to more efficiently use Earth’s finite resources.
“We’ve got to get everything we can out of every resource we can get it from,” noted Franzen. “The world is made up of 75 percent water, 12 percent mountains, deserts, forest, and ice, 6 percent cities, roads, and bridges, 3.5 percent poor quality non-agriculture land, and 3.5 percent land hospitable for agriculture production.”
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Another consideration is the advancement of technology and agriculture’s ability to use it to more efficiently grow food.
“Who would have thought that we would have the technology we have today 50 years ago?” asked Franzen. “Could we have predicted sexing semen or cloning animals? Biotechnology, bioenergy, animal and plant breeding, and agronomic practices have all advanced to our benefit.”
The U.S. agriculture opportunity is there for the taking, said Franzen. The future looks bright for farmers and ranchers.
“With our population growth, technology opportunities, natural resources, economic efficiencies, positive political and legal climate and solid infrastructure, U.S. farmers and ranchers are positioned well for the future,” he said. “So, should we start celebrating? No, there are definitely some pitfalls to consider.”
Franzen referred to the volatility of commodity prices, escalating input costs, runaway inflation and interest rates, skyrocketing land values and a reduced safety net as serious considerations for pitfalls and risks for the agriculture industry.
“Prices have been strong, but my question is how long will they maintain?” asked Franzen. “Another thing to think about is oil. Seventy percent of our oil supplies are located in politically and militarily sensitive areas.”
Looking at land prices, Franzen asked the crowd how sustainable the escalating values are. He explained that in 2010, 72 percent of land was purchased by existing farmers, with 23 percent bought by investors, only 4 percent going to new farmers and 2 percent as “other.”
“Here’s a few words of caution,” advised Franzen. “Be careful for the undisciplined pursuit of more. If it grows too fast, it’s a weed. Remember better is better before bigger is better. We don’t know what the black swan will be, but markets can’t keep going higher forever.”
Franzen said the general population is starting to believe that farmers are rich. Whether that’s perception or reality can be debated, but he stressed the importance of subsidies in the future.
“An increasing number of folks believe farmers are rich,” said Franzen. “This perception makes keeping subsidies in place even tougher. Some would say subsidies are unnecessary, but I believe they are an important safety net if that black swan comes and crashes the markets.”
At the end of the day, Franzen offered some banking advice – manage your balance sheet for success.
“Paradigms shift, but sound principles don’t; manage your balance sheets appropriately,” recommended Franzen. “Keep that working capital where it needs to be. Volatility is risky, but there is a lot of opportunity in volatility, as well.”
Certainly there are some pitfalls and risks in the agriculture industry today, but despite those obstacles, Franzen is confident that U.S. farmers and ranchers are positioned well. As the world population grows, agriculturalists will need to become more efficient than ever before to feed the world. Is agriculture the next economic boom?