Following an extended, exhilarating ride on a bull, the agricultural economy is currently in transition.
“Agriculture tends to go in cycles,” said Greg Cole, CEO, AgHeritage Farm Credit Services, at the April 22 Mid-South Agricultural and Environmental Law Conference co-sponsored by Delta Farm Press. “Those who had some economics classes in college understand business cycles. … Business and life have three cycles: you’re either in a problem, coming out of a problem or going into a problem.
“We’re obviously in a problem now, coming off one of the best runs in crop agriculture. Some refer to 2007 through 2013 as a ‘super cycle’ or the ‘golden age of agriculture.’ That was driven by the emergence and demands of the middle class in China and the emergence of the U.S. ethanol industry. To put things in perspective, 40 percent of all the corn in the United States now goes to animal agriculture and 40 percent is burned. The remaining 20 percent goes for ancillary products.”
The way to survive a cyclical business like agriculture is to “make decisions that maximize the good times and minimize the bad times. Another way to look at it is the decisions you make in the good times may very well determine how you make it through the bad times, or if you make it at all.”
Cole described the down cycle producers are now in as an “’efficiency cycle’ and that means costs need to come down in relation in relation to new price realities.”
The question is: how deep is the downturn? “This is the sharpest decline in net farm income since the 1930s, down 55 percent from the recent peak.”
A second question, said Cole: how long will the downturn last? “A recent Purdue University 100-year study came out that shows good times last five to seven years. Not so good times last 10 to 12 years. I’m not suggesting we’re in a 10-year downturn -- I certainly hope not. But when you look at the fundamentals we could very well be in for a five to seven year roll that started back in 2014.
“I don’t think we’ll see the same situation that occurred in the 1980s. We don’t have the leverage today that we had in the 1980s. However, the concentration of debt is a lot more today with fewer producers than it was back then. Even though we won’t see another 1980s-style situation, I do think you’ll see producers that experience some stress. Another difference between now and the 1980s is the interest rates now are much lower.
“My observation is our producers today have more business acumen, better skill sets. In the Delta, we have more risk management options and tools. Obviously, there’s more irrigation and that’s a big difference than when I began a career in farm credit.”
So, while we won’t see a revisit of the 1980s, “we will see some things we haven’t seen since then.”
Crop sector synopsis
Cole’s synopsis of the crop sector is there is large carryover stocks globally and relatively flat demand. And there are no new game changers on the horizon. “China’s middle class is sort of moderating, there’s no new ethanol, no new game-changing event that we’re aware of.
“A supply adjustment is needed since we have huge carryover stocks. Outside something like a huge weather event, the way to adjust supplies is an extended period of red ink. That’s a slow, painful process. From an ag-lending and producer perspective we have to understand this scenario. This period may be with us for a while and we’ve got to find a way to wait out this financial hurricane.”
With the new farm bill, “you only get help when things aren’t going well. Direct payments are gone. In the Delta, we liked direct payments. They were very simple with the producer knowing how much they’d get, when they’d get it. And when they got paid, (ag lenders) were paid.”
Prior to 2014, high crop prices and strong earnings coupled with robust farmland appreciation “allowed Delta producers to increase their net worth substantially. I saw some net worths increase double, some 2.5 times during the seven- to 10-year cycle.
“Many producers entered this efficiency cycle with very strong balance sheets and equipment. Notice I said many not all.”
In 2014, “a majority of our producers lost money on an accrual basis even when adding back the 2014 PLC payment on rice. Revenue fell more than expenses, which was a big factor. … We saw losses as much as $250 per acre and profits of $100 per acre. So, that’s as much as a $350 per acre swing.”
Then, in 2015, “a majority of producers lost money – probably 60 to 70 percent on an accrual basis -- even when adding the 2015 projected PLC payments. Expense control, yields and marketing on crop price rallies were key differentiators.
“Marketing was a big deal in 2015. Folks sold rice anywhere from $6 to $3.70 – a difference of $2.30. Well, a person farming 600-some acres of rice and achieving an average yield was looking at a $230,000 swing based on 100,000 bushels.”
For 2016, even with lower input costs “we expect very thin margins and, in some cases, more losses. Increased debt service requirements from prior losses will be a factor. There has been a lot of rebalancing, restructuring so there’s a lot more debt even though prices have rationalized.
“The good news is there’s a safety net. However, it may not sustain all producers through a long period of low prices and profits. We could lose the bottom 25 percent of all producers in the Delta during this cycle if it extends for as long as some economists suggest. The positive news is the top 25 percent will have the opportunity to expand. You’re already going to lose probably 8 to 10 percent of the producers through age, attrition and the like.”
For the short-term, understand cash is king, said Cole. Also:
- Make sure you have a good record system.
- Know your true costs, variable, fixed rent.
- Determine your burn rate, if any.
- Rebalance your balance sheet to make sure you have ample liquidity to absorb probable losses and match liability terms to new cash flow realities (get this done while you can).
- Focus expenditures only on income producing expenses.
- Curtail capital expenditures.
- Dispose of any non-income producing assets or extra equipment.
- Sell/leaseback of land.
- Implement good risk management practices.
- Implement a good marketing plan.
- Sell on price rallies.
“Profit sustainability is not just in the profits you make, it’s in the losses you prevent,” said Cole. “Risk management has become paramount. A producer makes money by taking risk. The key is to identify, quantify and manage the risk.
“Understand where we’re at in the cycle and understand where you are. Plan for the worst and hope for the best.” However, cautioned Cole, “hope is not a strategy. Have a strategy.”