Efficiency key to crop sector survival

Time to trim costs and ramp up risk management skills, says this lender

Are today's tight crop margins forcing farmers to become more efficient?

Let's hope so because that may be the only way to survive a long-term decline in grain revenue.

"We refer to this as an efficiency cycle, not a down cycle," says AgriBank senior lending officer Jerry Lehnertz. "Farmers enjoyed record years of profitability and became complacent. As we move into this cycle farmers must be more efficient again. 2014 was challenging and 2015 will be more so."

AgriBank, the wholesale bank that funds retail Farm Credit Associations in the nation’s heartland, surveyed its top Farm Credit lenders throughout the country in May to see what kinds of services farmers were asking for. Well over half said market risk management, and several also asked for help with business planning, interest rate risk management and crop insurance.

Tighter control on input costs will be an issue for 2016, adds Lehnertz. Start with seed.

"We're hearing some farmers are giving up some biotech traits for cheaper seed," he says. "GMO or stacked traits are costly, but if you give them up you'll need to relearn some agronomic and weed control management."

Capital spending needs to be looked at differently as well. In the past few years of good prices, many farmers paid cash for equipment or land; now they need to rebalance their balance sheets.

Land costs may be the most difficult adjustments for 2016.

"The prospects of re-negotiating rents will be extremely difficult," he says. "As for cash rent, there may be situations where a farmer can partner and sublease land to stay in the mix in the short term.

"I know of two farmers who walked away from high cash rent in 2015. It can be very emotional, because farmers who have aspirations to grow are very reluctant to lose relationships with landlords, and they are hard to mend."

Farmers will need to decide how long they can ride out this cycle and perhaps lose more money with hopes for better times later on.

Similarly, lenders will, at some point, have a say in that decision, depending on the financial situation of the farmer. "A lender would be remiss if he didn't counsel clients that there are tougher times ahead," Lehnertz says.

Who is most vulnerable? Farmers who used rented land and paid high cash rent the past four or five years to aggressively grow their farm operations.

"I don't think they will be in a great position going forward," he says.

"I don't know if we're at a new age of consolidation, but we're clearly going to see a year of 'at' or 'below' breakeven prices for grain farmers."

The strength of the balance sheet is the telling tale. If it's strong you can weather the storm for awhile. With the modest contraction we've seen in land values so far, this has been a soft landing for Ag. What agriculture needs to be aware of now is an erosion in the asset side of the balance sheet.

Meanwhile the livestock sector is doing well – for now. Lehnertz has been around long enough to know that cycle could change quickly.

"Lower feed costs built up that sector, but if they lose their discipline and expand too rapidly they could be headed quickly into  a down cycle, and that could happen as soon as 2017."

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