Prepare for tougher times

Nov 15, 2013

—Bankers examine what happens when "golden era of ag" comes to an end

What will an end to the recent “golden era of agriculture” mean to farmers and ranchers, as well as the bankers who loan them money?

With lower commodity prices, that is one of the central questions at the American Bankers Association National Agricultural Bankers Conference, which started last Monday in Minneapolis.

The availability of credit will be one of the keys to how the current sevenyear farm cycle—a “golden era”—plays out, according to Jason Henderson and Brent Gloy, both ag economists at Purdue University.

Farmers currently don’t expect lower prices to be the trend. A farm survey in March asked farmers what they expect for corn prices over the next five years. Most farmers expected the average cash price to be slightly higher than $5 per bushel. Producers saw a 10 percent chance of $7 corn. They also saw a 10 percent chance corn would average $4 or less. The economists noted at Monday’s meeting how close we are now to going under $4 a bushel.

“What happens when we get there?” Gloy asked. “How do they (farmers) recalibrate their expectations going forward?” While prices are falling because of record production, the costs of production are inching higher.

Forty percent of southwest Minnesota farmers have noted costs of production at $5.15 per bushel or higher, the economists said. That led to a series of “Whew!” comments from the audience.

The high cost of land and more machinery buys are causing a minor tick upward in farm debt. That raises some questions about just how much liquidity producers actually have in their operations.

“If agriculture has all of this cash, why is farm debt increasing?” Henderson said.

One challenge is getting farmers to understand they need to pay some taxes at the end of the year rather than buying and financing more equipment. Some of the lure to do that comes with tax law such as Section 179 equipment deductions.

“A lot of bad decisions have been made avoiding taxes with equipment,” Gloy said.

Still, over the past several years, farmers have been experiencing the wealth effect. More money means moving from buying land and equipment to buying recreational vehicles, boats and other toys, Gloy said.

“What tends to happen when we make a little money is we tend to get a little sloppy,” he said.

Then there are the young farmers who are ambitious. Their understanding of risk is defined by the last half decade. These farmers have dreams of buying more acreage in the coming years. More of them also may have to move away from the BOMD—Bank of Mom and Dad.

“We have a lot of really young, aggressive farmers out there whose whole experience with risk is in the last seven years,” Gloy said.

Bankers are spending more time trying to understand the needs of the growing number of younger farmers who were not in business the last time there was a major farm crisis. This comes as states are facing more cutbacks in programs such as farm extension services that in the past have helped farmers through these harder times.

“We’re seeing a tremendous educational void for developing these attributes and characteristics in these young people to be able to handle that first crisis,” said David Kohl, an agricultural economist at Virginia Tech University.

Brad Schloesser, Dean of Agriculture for Minnesota West Community & Technical College, said he teaches an enthusiastic group of younger farmers who seem to have little experience with significant risks.

“Until you really have to feel it and make hard decisions, you are dealing with inexperience,” Schloesser said, indicating many of those younger farmers haven’t had to tighten their belts.

Bob Humann, Senior Vice President of Lending for the Bank of North Dakota, explained North Dakota has multiple programs to help young farmers keep their interest rates low. Still, there will come a time when everyone will be dealing with higher rates and tighter credit. Humann advised bankers to help younger producers cope with that interest rate shock that could come with buying expensive land. “Make sure young farmers can service the debt,” he said.

Some banks have developed their own beginning farmer and rancher educational programs specifically to fill such a void in business management. In South Dakota, First Dakota National Bank has worked with 49 farm families through two different beginning farmer classes dealing with financial management and marketing.

“We all know the demographics,” said Nathan Franzen, President of the ag division for First Dakota. “We are going to have to grow the next generation of farmers if we are going to stay in this business.” — Chris Clayton, DTN