NORMAL, Ill. — The global economy and agriculture are transitioning to a new market dynamics that will place a premium on management.

Terry Barr, CoBank senior director of industry research, offered insight into the future structural shifts in world agricultural production and marketing at the recent Illinois Farm Bureau Commodities Conference.

Market volatility will continue, and the growing export reliance for grains, oilseeds, cotton, meats and dairy will increase exposure to global policy shifts and add new risk, according to Barr.

“Reliance on the export markets is going to continue to expand, and it’s going to expose agriculture to all of these major policy shifts,” he said. “If you’re a beef producer and Japan is cutting their currency, they are increasing the cost of U.S. beef.

“So all of these policy nuisances can have an impact of what’s going on in terms of these export markets, and obviously when you’re exposed to export markets, you’re exposed to a different set of risk than you were if you were in the domestic market. That’s just a harsh reality.”

Barr noted that risk management strategies will need to be reevaluated with particular focus on margin and marketing strategies, cost controls, regulatory compliance and counter-party risk.

“We are going to get crop and revenue insurance programs. They will probably continue to change, but they’re going to have to be integrated into the management strategy,” he said.

“It’s really a way of saying the producer is probably going to have to sharpen the pencil a lot more so than they have perhaps over the last three or four year and, I think, going forward.”

Precision agriculture technologies and data mining to control costs and boost production will be an integral ingredient in the transition strategies for all producers irrespective of size.

“Large-scale operators are going to do it, but small-scale operators are going to figure out how to partner up with others to put the same technology in place because you can’t run away from this technology as we go forward,” Barr said.

The transition will bring new opportunities as growth in the grain flows shifts to feed and export channels and new niche markets and storage options emerge.

“We’re going to move our focus away from ethanol to the export and feed channels,” Barr said, adding that while ethanol no longer will be the driver, its production is not going to decline.

“We’re also going to see some storage options emerge, so it’s going to be a different world in terms of when you begin to be a commodity driven by the demand side as opposed to the supply side — your real strategies have to change in terms of understanding where you’re going.

“Understanding those evolving domestic and global supply chains is going to be critical. Understand where grain has to move, how it has to move, what the infrastructure looks like, what the widening of the Panama Canal is going to imply in terms of ability to move grain to our gulf ports.

“Do we have locks and dams that can move enough grain to supply that kind of a channel or is that going to be the major constraint in terms of putting the grain into the marketplace and what does that mean for basis and pricing in the country if we do get jammed up in locks and dams.”

Barr predicted that competitive pressures in the global marketplace will intensify since productive capacity has been expanded in response to strong prices.

“We know that the world’s largest consumers are out there trying to diversify supply,” he said. “They’re really trying to find other places to get grain from, and they’re making investments to do that. Infrastructure is going to be a bigger and bigger issue once we have to move into a different supply chain to accommodate these larger crops.”

The regulatory and market demands for more scrutiny of the food chain will expand and impact domestic and global supply chains, according to Barr.

“All of those issues on food safety, animal welfare, traceability, sustainability and environmental regulations are not only going to expand, they’re going to go global, as well as domestic,” he said.

“That’s probably going to add to your cost structure. I’m not sure it’s going to add much to your returns, but I’m almost certain it’s going to add to your cost structure in your compliance requirements going forward.”

Barr expects major tax code changes in the future, and new rules on depreciation, 1031-like exchanges, accounting options, estate taxes will alter previously optimal business structures and strategies.

“If we do a major rewrite of the tax code, we could really altar what is the most optimal business configuration you really want to be in. That will be a challenge because once that’s in place, that’s what you’ll live with for that next generation,” he said.

Investments in equipment, land ownership and rental commitments will need to be reassessed in a new market environment.

“Agriculture is used to this — but that doesn’t mean it’s not disruptive, at least in the short term. But we will have to realign kind of where that new normal is as it begins to emerge,” Barr said.

“It’s probably not going to all get taken care of this year. You’re going to need another big crop to kind of find out where that level is, and that’s going to lead you to this volatility.”

Barr said he has been asked for his outlook on future agricultural prices.

“I’d say that I would plan on corn being between $3.50 and $7 because that’s the reality of where we’re at. Now maybe with another big crop and we get some inventory in place and we can talk about a little bit narrower range,” he said. “But it’s unrealistic to believe that we’re out of that volatile period.”

The need for a strong balance sheet with significant working capital will be critical in accessing the increasingly expensive debt capital required to implement transition strategies.

“That’s kind of the real reality of where we’re going over the next five to 10 years is that capital is probably going to get more expensive,” Barr said. “The technologies you’re going to need to be in agriculture are going to get more expensive, and that’s going to challenge the balance sheet and working capital of everybody going forward.”

“So we’re going to be going through another transitional phase here that is really going to be driven by forces outside of the domestic economy, as well as inside. I’m an optimist about agriculture going forward, but it’s not without its challenges at this point.

“No, we’re not going to get $7 corn forever, but I also think that new normal out there is a very positive new normal for agriculture going forward, but it’s going to be very challenging in terms of the technology and the pressures that it puts on cost control and yield enhancement in order to remain competitive in a global market.”