View from the Agriculture Class

Last week we hosted our fifth annual agriculture lending class.  This one was in Bismarck and we had 47 students; a new record for us!  The class ranged from field lenders, analysts, and managers.  Experience levels were from brand new to those who can tout decades of agriculture lending experience.  This blog will review some of the highlights we took away from the lenders in the class.

Stress is quite present with the producers in the areas represented in the class.  We hosted students from Montana, the Dakotas, Minnesota, and Wisconsin.  There are producers who have no or very little debt.  The ones which keep our class up at night are those who are highly leveraged for the current prices we are experiencing currently.  The challenges that face producers who have leveraged their operation up with loans on new equipment or land when prices were much higher 4-5 years ago is again taking a toll on the farmer. 

We had several lenders who reported that they are now in the third or fourth year of some carryover debt on the operating lines.  This presents a double challenge with not only having to deal with the financing carryover of the past year and must work on the need to finance this year’s operation.  Some wonder what is the magic formula that can be used to determine when to cut off the producer.  There is no magic formula available and each situation is looked at differently. 

Most students believe we are in the winter season of the ag economy and that we face another 3 years or so of low prices which will weigh heavy on the producers.  Trade issues are on the mind of many as looming trade wars with countries that import U.S. agricultural products are starting to curb their purchases from us.  Some were heartened with the recent one on one work that is being done in negotiating with the Eurozone and Mexico.  Overall, even if trade issues disappear overnight, there is still downward pressure on prices with the oversupply of commodities present in the world. 

Assessing management skills of the producer was a topic mentioned by several lenders.  It seems that there needs to be a method to better understand the ability of the farm borrower these days, especially now that we are facing yet another year of low prices and possible thin margins.  If you understand the skills of those running the farm, you have a better idea of who has the highest probability of succeeding in the present price environment.  We discussed some ideas on how to turn a very subjective rating on the management skills of the farmer into a more detailed quantitative analysis.  The operators who will thrive in this environment are those who can win at the 5% rule.  They can find ways to increase their production or get a better price by 5% and find methods to decrease their costs by 5% compared to their neighbors. 

Some lenders spoke about the risks of generational changes in the farm.  Some aging producers do not have a solid plan on how the farm will continue when they decide to retire.  Plans seem to be in the head of the producer and are not written down.  These are also not reviewed by their accountant and attorney for any tax issues. 

Divorce is probably the biggest risk to upset the family farm.  Lenders spoke of the necessity to understand which role each spouse plays in the operation.  If marital problems appear and the wife is the manager of the operation while the husband is the tractor driver and field worker, you will end up lending differently to the remaining spouse if you are working with the manager compared to the laborer. 

Some in the group who had experienced the ag crisis of the early 1980’s commented on the differences today compared to then.  Farmers overall tend to be less leveraged today.  There is more discipline regarding financing reporting and better overall understanding of the producers in how finances play a role in the farm operation. 

One of the biggest challenges is the marketing plan of the producer or how the farmer decides to sell his product.  Too many farmers have grown a crop and had a large portion of this exposed to market prices without any sort of contracting, price protection insurance, or commodity market hedging.  One dire situation this year is for North Dakota soybean producers.  It has been reported that elevators are only going to take the crop that they have already contracted for and are not taking any additional crop.  So, the soybean farmer who is exposed to the market will have to deal with storage costs, shrinkage, and further price exposure as they hope to have this year’s crop sold middle to late 2019.

We expanded our office space and added a conference room that we did not have before.  This allows us to have small classes on business or agricultural lending that we had no place to host before.  If you have some interest in making a trip to the Black Hills this fall for some quality commercial education as you enjoy some of the sights of the area, please reach out and let us know.