Ag bankers heard a common theme throughout this week's annual Ag Bankers Conference sponsored by the American Bankers Association: Agriculture will face more stress in 2015, but low-cost producers should survive.
The meeting, held at the CenturyLink Center in Omaha, Neb., brought together bankers, economists and financial analysts to discuss big data, 2015 profit margins, estate planning and expectations for global and domestic economies.
Ed Seifried, professor emeritus at Lafayette College in Pennsylvania, said he did not believe interest rates would move much in the next year despite quantitative easing. New Mexico State University Ag economist Lowell Catlett talked about revolutionary technologies like medical self-diagnosis and synthetic gene circuitry. Seed geneticist and farmer Harry Stine shared his rags-to-riches story focusing on plant breeding and his dream to use narrow-row, high fertility systems to push corn yields to 300 b. per acre.
At breakout sessions bankers heard about the key ratios to watch as grain farms try to stretch working capital over a period of low prices. Speakers urged them to help farmers with financial stress tests and accrual-adjusted income statements.
Some farmers may need to restructure debt to keep cash flowing the next two years, says University of Minnesota Ag economist Dale Nordquist, who predicted most grain farms would lose upwards of $35,000 next year based on projected costs and income.
"Both producers and lenders will need to sharpen their cash flow projection skills," says Nordquist, who will guide workshops at the upcoming Farm Futures Ag Finance Boot Camp, on Jan. 6 in St. Louis.
"2015 it will be another good year for livestock producers and very challenging for cash crop producers," he adds. "But, cash grain guys should remember, livestock producers went through this in 2009 and the vast majority survived and are now thriving."
Who will struggle? "Those who used up too much working capital buying land and avoiding taxes," says Nordquist. "Those who can't get their family living costs back in line; those small farms that sold off livestock to become cash grain farms; young farmers who lose their land base in rental competition; and 'Go-Go' farmers who win those land rental competitions."
On the other hand, several speakers talked about the deep pockets that have grown even deeper the past several years thanks to high prices. In a separate session University of Minnesota economist Bob Craven asked, "How many of you are worried about your crop farms?" Over half the hands went up.
It turns out crop farms have more working capital as a percent of gross income right now than dairy/crop, hog/crop or beef/crop farms combined, says Craven. Average annual increases in earned net worth from 2004-2013 for Minnesota farms, based on FINBIN data, was 13.5% - better than the stock market. Most of that increase came since 2008.
Nate Franzen, Ag Division President at First Dakota National Bank in Yankton, S.D., told Farm Futures that farmers may not have needed lenders much these past few years, but they can become a valuable business partner as the farm economy shifts to tighter margins.
"You can change your management to improve income outlook, and lenders can help you make those changes," he says. "But be ready for more scrutiny. When times are good it's human nature for all of us to be complacent, and that includes bankers. Now bankers are going to start asking a lot more questions. Not in an intimidating way, but it's important we all sharpen the pencil to know what to expect in a new price environment."
You can see the full conference agenda here.