As of late, the economy surrounding agriculture always seems bleak; the next commodity price drop is just over the horizon, the experts say. But if you’re part of a business that works closely with farmers, extending credit or carrying their debt, it doesn’t have to be so gloom-and-doom. There are four steps you can encourage them to act on to help set you both up for a successful future.
There’s no doubt agriculture is in an economic adjustment cycle, the natural fluctuation between periods of growth and recession. 2017 had better crop yields than expected, which provided more optimism when looking to the future, shared Farm Credit Mid-America CEO Bill Johnson, who spoke at the Independent Professional Seed Association (IPSA) annual conference in January.
It’s hard to determine when the agriculture economy will come out of this economic adjustment period, he said. Bullish bankers hope that the economy will be better within two years; however, it’s more realistic that it will take four to six years.
“As you think about net farm income, we have to remember that we’ve come out of some of the best economic times in corn and soybeans in our lifetime,” Johnson said, noting that this has been beneficial to nearly all of agribusiness. But, he said, when you look at any individual outfit, you can see the economic adjustment happening … everything’s leveling out.
According to the U.S. Department of Agriculture’s November Farm Income and Financial Forecast, after three consecutive years of decline, farm sector profits were expected to stabilize in 2017, while net farm income was predicted to increase by $1.7 billion (2.7 percent) from 2016 to 2017 at $63.2 billion.
Despite this, it’s necessary to take a step back and consider the debt-to-asset ratio of the individual operations you work with, Johnson said, explaining that you’ll notice in larger, more leveraged operations, there tends to be a higher debt concentration.
Meanwhile, the next two to three years might prove to be more difficult because we’re exiting a time of low interest rates and entering a time of higher rates, while still needing loans.
In a summary of a Kansas City Federal Reserve study, Kevin Van Trump, president and founder of Farm Direction and the Van Trump Report, reported that farmers were beginning to take more loans, and those loans often have higher interest rates.
“Demand for all types of loans except farm machinery and equipment increased significantly from a year ago,” he said. “The total value of operating loans and livestock loans increased almost more than 50 percent, compared to the same period last year.
“Loans of $100,000 and more account for the majority of farm loan volumes at commercial banks, accounting for more than 70 percent of total loan volumes.
“Interest rates on all types of farm loans increased in the fourth quarter, continuing a trend of recent years.”
The Kansas City Federal Reserve reported that rates on loans used to finance current operating expenses increased nearly a full percent, from 3.7 percent in 2016 to 4.5 percent in the fourth quarter of 2017. In addition, for the first time since 2014, more loans were issued with interest rates greater than 6 percent than loans with 3 percent or less.
This means businesses and farmers now must learn how to move forward with healthy money practices to break through this economic cycle. Johnson highlighted four actions that you can take as a business and encourage your customers to take, ensuring your continued success together.
When confronting interest rates, he said to consider long-term fixed rate funding.
“The flattening yield curve is causing long-term rates to have less of a premium over short-term rates than typical,” Johnson said. “Long-term fixed rate funding could be very beneficial when appropriate.”
The second step is to develop an operational strategy that can provide some padding for shrinking margins.
Furthermore, with long-term rates rising, it’s important to understand what a “normal” farm year looks like. Johnson said this means knowing where debts are and making sure they are structured appropriately, given today’s margins. Johnson said you can get a more accurate picture of real income by removing high years and low years. Johnson encouraged businesses to be proactive and sit down with their lender to walk through possible strategies.
Finally, Johnson said exploring opportunities to add income and diversity can help mitigate the impact of a down economy. Businesses and growers must be progressive in order to maintain the longevity of their operations, he said.
With these 4 steps, you can help set your business up for a successful year.