Decoding Agricultural Economics: Research with Dr. Aaron Smith

[00:00:00.750] - Chris Griffin
Welcome to Back to your Roots, a podcast that provides insight into all things farming, financing, and farm life, guiding you back to your roots. Thanks for joining us today. I'm your host, Chris Griffin.

[00:00:20.500] - Jordan Turnage
Hey, guys. I'm Jordan Turnage. As always, thank you so much for listening to us. Today, we've got Dr. Aaron Smith here in the office with us. He's a professor and extension economist with the University of Tennessee, Knoxville. Dr. Aaron also serves as a board of director to River Valley AgCredit. Dr. Aaron, thank you so much for coming in.

[00:00:36.630] - Dr. Aaron Smith
It's my pleasure.

[00:00:37.580] - Chris Griffin
Dr. Smith, can you tell us a little bit about your background, personally and professionally? I know I did a little research on you today before I came in. I know you're at University of Tennessee, which pains my heart a little bit, but we'll still respect that. But if you would just go in a little bit for the listeners and explain your background and where you came from and what that looks like.

[00:00:57.930] - Dr. Aaron Smith
Sure, yeah. I originally grew up in Western Canada, actually, on a row crop and beef farm in the province of Alberta. And after I ended up finishing my undergraduate, I went and actually worked for a large commercial bank, working in a variety of different roles, anywhere from being a loan officer up to the adjudication part of the lending process. After that, I went and I did my master's and PhD at the University of Arkansas. And when I finished there, we moved to Tennessee with my wife and at the time, two kids. I have three now, and I've been at the University of Tennessee here in Knoxville since 2013. So we've really enjoyed our time here, really love the area, and it's been a great experience so far. And so in my role here at the University of Tennessee, I do a lot of work in row crops, particularly corn, soybeans, wheat, and cotton. And then I look at general economic indicators as well. A lot of my work revolves around working directly with producers, going out and meeting and talking with them, discussing a variety of topics anywhere, from marketing programs to risk management, crop insurance, and any of the federal programs that come out that would affect the farmers in Tennessee.

[00:02:14.480] - Jordan Turnage
You've just been all over the place, haven't you?

[00:02:16.080] - Dr. Aaron Smith
I have. I've lived in several places. I do enjoy traveling. So one of the good things about my job is I get to see a lot of different places, both in the US and across the world. And so it does give you a bit of a different perspective sometimes. It makes you realize how fortunate we are where we live right now.

[00:02:33.750] - Jordan Turnage
Oh, yes, sir. So what we're going to dive into today is we're going to talk about you as far as being an economist, and we're looking at the general economic data for multiple points in time. Can you explain that and just let us know how economic indicators have changed over the past few years?

[00:02:48.600] - Dr. Aaron Smith
When we're looking at two different components, I'll look at what's going on in more of the general economy, and then I'll actually look at what's specifically going on in the agriculture economy. And both of those are tied. Obviously, when we're looking at general economic indicators, we look at things like GDP growth and government expenditures. Very hot topic over the last couple of years has obviously been inflation and interest rates. And so we look at trends in those. The important thing that we always have to remember with economic data is that it is not a forecast. It's actually looking backwards. And so it takes a while for this data to be collected and analyzed before it's released. So any of these economic measures that come out are typically based on either a previous quarter or previous month's worth of data, and maybe aren't necessarily reflective of what's going on right now in the economy. And so when we look at that, we have to always consider there is a lag in terms of the general economic data that is provided and what we're actually showing in the economy right now. So it's a real challenging balance from a policy standpoint to look at past data and try to end up saying, well, how is that going affect where we are right now in terms of the economy?

[00:04:03.730] - Jordan Turnage
Trying to get everything to correlate with each other. It's very similar to what we do as loan officers in our analyst department. When we look at historical trends, that's our big thing that we try to do as far as forecasting our repayment capabilities and overall forecasting as far as looking forward to what producers are going to look at going forward, going into the next year, especially when we set up guys on a three-year line of credit for folks. We really have to have a good trend analysis of that history beforehand to get a good idea of what things are going to look like in the next three years. Yeah.

[00:04:37.060] - Dr. Aaron Smith
I mean, data is always changing, right? And so you can actually get conflicting indicators. Right now, if you look at a table of different economic indicators, there's some really good ones and there's some ones that are more challenging, right? And so when we end up thinking about inflation has been one that's been challenging. But if you look at the stock market over the last year plus time period, if you've had in the stock market, your returns have actually been very good. Now, we've seen some volatility creep into the stock market, so that might be a little bit concerning. But if you go through a whole bunch of different economic indicators, there's going to be positives, negatives, and neutral indicators. And so it's just real challenging sometimes to look at what's going to end up affecting different components of agriculture. And so it does depend on what industry you are in as well as what economic indicators are important to end up monitoring. And one of the ones that's What's easy to end up to consider is if you look at something like personal consumption expenditures, that can be very important for different agriculture commodities, and it can vary in terms of if you have large amounts of discretionary income, there's certain egg sectors that do better than if you have lower amounts of discretionary income.

[00:05:48.570] - Dr. Aaron Smith
Just looking at simple indicators like that, there are direct implications for the egg economy.

[00:05:54.870] - Chris Griffin
That actually led into my next question, and you already answered part of it because one of the questions we were going to ask is, what are some of those key economic indicators for farmers and what should they watch for? When you're saying how that creeps in and how it directly affects a farmer, what does that look like from your end? If you're having a conversation with a farmer who's wanting to, obviously not really forecast, but prepare, what are some things you're discussing with them?

[00:06:18.240] - Dr. Aaron Smith
One of the ones, and this is something that has continually been a challenge for producers is labor. When we look at key measures, the unemployment rate is one measure, labor force participation rate is another one. What we want to end up looking at is, Okay, well, do we have an adequate supply of labor? And how is that geographically distributed? Just because you have a surplus of labor in one area, it doesn't necessarily mean that you have the access to it in another. And so in agriculture, we rely on several programs to end up getting the adequate labor. So that's one that we end up tracking pretty closely, is participation in certain programs like the H-2A program, but also looking at those broader-based economic trends in terms of labor, how many people are participating in the labor market. Another one that is probably a little bit less known, but we look at unemployed persons per job opening. It gives you an idea of how many jobs are out there relative to those that are actively looking for employment. And so looking at those, you can get some regional data. A lot of it is tracked more at the national or at the state level.

[00:07:23.200] - Dr. Aaron Smith
But it is really important because it gives you an idea of what the labor force trends are. And if you look at a state like Tennessee, for For example, we've had a lot of people move into the area. Our labor markets are actually tighter than the national average. And so there is a huge amount of this data that is maybe presented as national, but has more of a state-level footprint if you really want to understand what's going on and how it's going to affect agriculture.

[00:07:47.790] - Chris Griffin
That was actually something when you were talking about the labor market being different in certain geographic areas. That's actually my next question because I thought, yeah, we get these national numbers, you're watching the news, but that could vary greatly from, let's say, the upper northeast to the deep south. It could be vastly different. That's a good point. I guess when you're looking at that and you're looking back on those numbers, how does that factor in when you're trying to present that to somebody, when something's maybe vastly different in some parts of the United States and different in others?

[00:08:24.100] - Dr. Aaron Smith
Yeah, for sure. It's not just geographic as well. It's based on job roles as well, because There's certain positions that are more challenging to end up filling. There's ones that are more skill-orientated, and there's ones that are more labor-orientated. And it's not good or bad comparing the two. It's just that you have different workforces there and different willingness to end up participating in those as well. So if you think of very labor-intensive agricultural activities like vegetable production or tobacco, it's really important to end up relying on immigrant labor and the H2A program to ensure that you have a functional labor force that is going to be able to accomplish tasks in a timely manner. Because we all know that agriculture is very seasonal in terms of when we need labor and having access to that is just incredibly important. So there is that component as well when you're looking at geographically and then also across different job functions. And so it's something where there's going to be continual challenges making sure that we have access to agricultural labor across multiple roles, all the way from field up to support industries as well. It's always challenging to keep good people in a tight labor market.

[00:09:42.140] - Dr. Aaron Smith
There's obviously an incentive to end up I guess, poaching people from other organizations. So that's something that it depends on the job role in addition to the geographic location as to how the labor market dynamics work.

[00:09:55.410] - Jordan Turnage
That's why the H-2A program is very, very vital. It's a real highway that we have to make sure that stays open to us on a state level and a national level, not just as far as the Hispanic movement that comes up here during the season. But we also see several folks in West Tennessee and the Missouri Boot Hill using folks from South Africa as labor force that come over here for cotton production from what I've seen growing up, too. It's really important to make sure that we're on a marriage of a state and national and global market as far as keeping everybody happy. We'll swap over now and we're talking about as far as local markets. Farmers in the past have always had to look as far as the local markets affecting them. But as we've seen going into the past 10 years or more, I would say that we are definitely having more of a global push as far as having to look at the markets in our grain markets. Can you explain the current price trends and how global markets influence the price on a local farmer level?

[00:11:00.290] - Dr. Aaron Smith
Yeah, for sure. It is important. Obviously, we produce an abundance of food in the US. And so global markets are very important for distribution of pretty much all of our agricultural commodities. I'll use soybeans as a good example because they are our most dominant export from the agricultural sector. And when we look at it, you can break soybeans in terms of the global nature of the market into two different components. You can talk about the supply side, where it's essentially the US, Brazil, and Argentina that are producing over 80 %, well over 80 % of global soybeans production. And so what happens in those countries really will determine what happens with the market. And so as we're entering or we're well on our way in the US harvest, this is the time of year where we'll see them start planting down in Argentina and Brazil. And so what you'll end up seeing is since our crop will be coming out of the fields and theirs will be going in, is that the weather risk and production risk will actually shift down to South America compared to where we are right now. And so when we look at price movements as we move from October into January, changes in weather patterns will be much more important in South America than they will be in the US in terms of what's going to happen with soybean markets.

[00:12:18.750] - Dr. Aaron Smith
Now, if you look on the demand side, one of the big pushes that's out there is trying to diversify market because obviously China is by far and away the largest purchaser of Soybean. So having access and stable access to that market is incredibly important for our soy being farmers in Western Kentucky and throughout Tennessee. And so it's really important when you have that large of a player in there that we have fair and equal market access or fair and equal treatment in terms of being able to get our products into those. And that's something that continues to be a challenge. There's obviously so many factors geopolitically that are not under the control of farmers. So we are still subject to other external influences in terms of accessing those markets. But they are incredibly important. They can provide huge price swings. If you think back to when we ended up having the trade war with China, the impact that was presented on markets during that interval was pretty dramatic. And so, again, when we look at that, we do focus more on the local and national markets in the US, but they are very strongly influenced from the global marketplace.

[00:13:32.060] - Jordan Turnage
For sure. We went to a grain market commodity class back in Martin a couple of months ago. And them talking about in just Brazil alone, there's sections of the rainforest or not so much the rainforest, but in that region, that former just wooded areas that they're bringing into row crop production. And in sections of it, they were saying about the size of Ohio, that can be brought into production for just next year alone.

[00:13:58.810] - Dr. Aaron Smith
Yeah, it's somewhere It's a very interesting development down in Brazil and Argentina to a lesser extent as well. One thing that's really interesting to see is their farmers are very similar to our farmers in that they're price responsive. So as they enter their planting season in our fall, their spring, what they'll end up doing is they'll be looking at the prices that are available on that market and trying to figure out how much they're going to end up planting. And so, again, everything is interconnected in terms of what's going to happen from a supply stand, what's from the demand side that's connected through those global prices. One of the keys, and we've got a pretty good advantage logistically still in terms of moving our products in the US, but it's imperative for us to maintain that competitive cost structure so that we can be a low-cost provider of not just soybeans, but all of our agricultural products to the global market.

[00:14:55.170] - Chris Griffin
I think you make a good point. I think that it's always good to look at your local markets, but the world is so interconnected now. So many little things that, like you say, could happen in South America or wherever that is, it's going to have a direct impact on your small row crop farmer here in Ballard County or East Tennessee or wherever that is. When a farmer is watching the news and seeing things that are happening, what are some, not just economic events, but just events in general that could really have a direct impact on them and their prices moving forward, especially when you're looking at current price outlook for corn, soybeans, wheat, poultry, cattle, etc?

[00:15:32.520] - Dr. Aaron Smith
Yes. I mean, one of the keys is to always look at see what... If you're looking from a production standpoint, you're always looking at what key players there are in terms of markets, and that'll vary. Cattle markets will be different than soybeans, and cotton will be different than soybeans. You want to be understanding about particularly weather events that are going on. But the other big one is geopolitical events, right? And so, I'll use the European Union as an example, right? Their policies do dictate what the demand for US soybeans are. I know this past spring and through the summer, ADM came up with a deforestation premium from soybeans for certain delivery points. A lot of that's driven by European Union policy. And so, they wanted to end up certifying that soybeans came from a deforestation free area, and they were willing to provide a premium for that. And so, producers can benefit from that. That's not driven by US domestic policy, that's driven by European Union policy. And so you can't stay on top of everything. But key components like that for policy development for large markets or large blocks of economic activity is really important for is to at least have an understanding of what's going on and what some of the trends and issues that are prevalent in those markets.

[00:16:52.590] - Jordan Turnage
So, piggybacking off of that, as far as looking at profitability for farmers right now, how is the input prices and technology influencing farm profitability for farmers?

[00:17:04.230] - Dr. Aaron Smith
Yeah, it's really challenging right now on the row crop side of things. We had some good years before this one in terms of pricing. The livestock sector is actually still pretty good. Prices are down from the peaks, but the livestock prices are reasonably solid right now. But when we look at row crops, particularly this year, there's going to be definitely a reduction in income, lower profitability levels across a pretty good chunk of the US, and a lot of that is driven by price. Now, the ones that concern me more is if for those producers that took a price and a yield hit this year, I think, is going to be more challenging for them. We did have some flash drought in Tennessee that is going to keep us well behind where our trend line yields are. A lot of that was more in the Southern and Eastern portion of our state. But our yield, I've seen yesterday that the USDA released our yield estimates, and it was, I think, 153 bushels per acre on corn, where normally we'd be as a state average, up in that 175 plus range. And so, it's those producers that worry me in terms of, if they're going to get the hit on the on the price, which is down over 20% compared to last year, and then also get that yield hit.

[00:18:21.040] - Dr. Aaron Smith
If you do have a producer that has above trend line yields, and they take that price hit, yes, it still hurts, but it's maybe not as bad as if you take that double hit in terms of both price and yield. One thing that I think is always important is to stay on top of technology. How can it be utilized on your farm? Not just from a production standpoint, but also from a marketing standpoint. I know one that we get a fair number of calls at up at the university here is storage systems, storage and drying systems in particular. There can be some real benefits to being able to get out into the field and maybe harvest at a little bit higher moisture percentage, and then also having the ability to end up storing those commodities to look for better opportunities in the market if they present themselves. So it's one of those ones where you're always considering how can technology help me from a cost standpoint, but also how can it help me from a revenue standpoint? And so it's very important to stay on top and at least have an understanding of some of the trends.

[00:19:22.010] - Dr. Aaron Smith
I know one of the other ones that we've seen a fair amount because our fields in East Tennessee are much smaller than in the western portion of the state, and the western portion of Kentucky is using a technology like drones for precision spray applications. I think there can be some real value in utilizing those types of systems where we maybe can't get that aerial application on some of these small, irregularly shaped fields. And I think that can be translated into larger farms as well. I think there can be an efficiency there. Just having that knowledge of where technology is and how it can help improve efficiency and reduce costs as well.

[00:19:58.430] - Jordan Turnage
I totally agree, especially going back on, we're talking about grain storage right now. We've got several guys, I would say, in Western Kentucky right now that have probably been, from what I've heard, as far as moisture levels, as high as 25% on their corn, because they've got the grain storage capability to let it just go ahead and sit in the bin and dry. When the moisture comes down and watch the markets, they can sit on it until it's ready to sell. Then also, as far as the drone technology is going, that's really taken off in our region on large and small. There's several drone affiliates that come around here and starting to take on spot spraying and checking fertilization on fields for doing non-variable rate on putting out crop production, that stuff.

[00:20:40.320] - Dr. Aaron Smith
Yeah, it's a real benefit if you just think it intuitively about it. If you have an area of the field that you can target efficiently through a drone application, whether it's an application of a crop protection product or whether it's just identifying where you end up needing more potential fertilization or something like that, I think that efficiency can really be a real benefit rather than just blanketing the entire field. Targeting individual spots can be really efficient in terms of input use and being able to end up maintaining that yield on the smaller portions of the field.

[00:21:13.820] - Jordan Turnage
And saving. And Farmers being able to not have to worry about soil compression. Again, compaction issues with going through the field multiple times with a sprayer. Fuel efficiency, having that greener efficiency rate that we're looking to help do in the long run.

[00:21:27.670] - Dr. Aaron Smith
Yeah. The other one, you made a good point getting equipment into the field. We all know that when it rains here, it can take several days, if not weeks to have stuff dry out. Well, if you can aerial apply it or use a drone to precision apply a chemical, you're not constrained by the time that you can get into the field, which is massive in terms of securing yield.

[00:21:49.180] - Jordan Turnage
We've had previous conversations with people in here before, like Darren Grogan and Aaron Wilson. They are big proponents of the drone technology, and they've taken that on full force. Like you say, they don't have to sit and wait for stuff to dry. They can look at their maps with the technology that they have as far as being able to say, alright, well, this is so much % dry. This is so much % dry. I can go out to here, here, and here, and go ahead and tackle that right now instead I'm not having to just sit and wait. Then I'm not having to send the guys home early and then worry about retention rate as far as your labor, and then overall cost of being able to send out folks and applying the drone technology out there to keep you on your costs down for applications and sole compassion like we talked about originally.

[00:22:33.680] - Dr. Aaron Smith
Yeah.

[00:22:34.200] - Dr. Aaron Smith
I think it's a fascinating technology, and I think we're just starting to scratch the surface on that. Things advance so rapidly. And I think if you look at technologies that are reasonably new or are becoming more prevalent, things like AI, where you can end up gathering and digesting large pieces of data. If you can have that real-time feedback between a drone and your decision-making software, I think that we're just starting to learn where the potential is there and how that could maybe really impact our efficiencies and our ability to take field-level data and turn it into an actionable decision that's going to end up helping secure yield or improve profitability.

[00:23:16.320] - Chris Griffin
At the end of the day, and ultimately, the more efficient you can be with your inputs and things, it's going to make for, hopefully, a more profitable year and something that I know that is headed that way. Looking, is there anything else I know we've dove into this pretty hard, but if you're talking to farmers here locally and in your region, is there anything you would tell them to look forward to or things they need to be aware of as we move into 2025?

[00:23:43.140] - Dr. Aaron Smith
One thing that's unfortunate is we're probably going to be in a lower price environment than we have been the last three years. Things can change, obviously, dramatically. If we get a weather event someplace across the globe, in terms of, principally, it'll be South America if we're going to see a rise in corn and soybean prices. But there is an abundant supply of both corn, soybean, wheat, and cotton as well. And so that's going to keep a lid on prices unless we see a supply disruption. One of the things that I always encourage farmers to end up looking at is, okay, let's look and see where we are in terms of our profitability as we enter the 2025 production season. What are the resources that we're going to end up needing if we are in this lower cost or lower price And then also looking at the cost side, right? Because we have seen some fertilizer prices come down pretty substantially, not as much as row crop prices. But we do foresee as we enter this lower commodity price environment, also to see some inputs come down in price as well, which obviously will help those margins.

[00:24:50.560] - Dr. Aaron Smith
It may not be enough to offset the price declines, but it's penciling that out and seeing where you are in terms of a projected price versus your cost structure, I think is so important just Just to understand where you are potentially for profitability as you look at planting the 2025 crop or planting to end up getting that out and how that might end up affecting your decision making this winter.

[00:25:13.300] - Jordan Turnage
It's come a long way from just being buy low, sell high, right?

[00:25:18.420] - Dr. Aaron Smith
It is. It's one of those ones. And this is another one that I always encourage producers to consider, right? I mean, marketing and management is such a very important component of agriculture right now, and we all have our unique skill sets. Some people like to focus more on the production or agronomic side of things. There's people that are fantastic at fixing, maintaining, and operating machinery. Some people do gravitate towards the business side of the enterprise, and then also the marketing side of the enterprise. Making sure that you surround yourself with a good support network. And if you do maybe have a deficiency on the marketing side, maybe find a person that can help either as a consultant or as a broker or somebody that can end up helping you with those decision making processes, because it's very important to have that support network that can end up helping you as you look at making decisions that are going to affect your business.

[00:26:13.900] - Jordan Turnage
Yes, sir. Absolutely. He hit the nail on head on that one. Well, Dr. Smith, you have given us a will of knowledge and insight on economics and agriculture this morning, and I thank you so much. I know that we've learned a lot today, and there's still a lot more that we could scratch the surface on, and we've definitely got to get you back in here again. And bend your ear and get some more information out of you. I know the farmers are dealing with the issues of 2024 going into 25, but like I've been trying to tell folks, it's a good thing that for the most part, we've got high yields in a down market, but at least we're not having to deal with down yields in a down market as well. So there's always a silver lining, and that's what makes farming fun. That's what I always try to tell folks, too.

[00:26:51.880] - Dr. Aaron Smith
It is. I mean, there are cycles. Nobody can accurately predict the length and duration of cycles. But we know that there's always cycles in agriculture prices. And as we enter a lower price environment, that too will come to an end. Just making sure that we're using the appropriate risk management tools and staying on top of our finances, I think, is just imperative. But it is something where I'm always optimistic as to the long term future of agriculture, just because it is such an important industry, both in the US and globally.

[00:27:25.590] - Jordan Turnage
Yes, sir. Well, Dr. Smith, thank you so very much for coming on the podcast today. We appreciate your insight. We appreciate all that you do for us as far as a director to the association as well. We look forward to seeing you face to face. I didn't attend University of Tennessee, but I grew up in Tennessee, so I am a Vols fan. So go Big Orange. I appreciate all that you do for us.

[00:27:42.510] - Dr. Aaron Smith
I appreciate it. Any time. I always enjoy talking about economics and agriculture. So I appreciate it.

[00:27:48.350] - Jordan Turnage
Yes, sir. Well, thank you so much for listening to us on the Back to your Roots podcast today. For Chris, I'm Jordan. Thanks for listening.

[00:27:54.850] - Chris Griffin
Thanks for tuning in to Back to your Roots, where we dish the dirt on all things ag. Be sure to never miss an episode by following and subscribing. While there, leave us a review about what you want to hear next. Stay in the know between episodes by following us on Facebook, Instagram, Twitter, LinkedIn, and TikTok. For more resources, go to our website at rivervalleyadcredit.com.