Editor's Note: Dave Kohl is a man on the move. Each week he travels somewhere in the U.S., Canada or overseas, talking to farmers, agribusiness groups, bankers and CEOs about the major trends he sees driving agriculture. Dave is an ag economist specializing in business management and ag finance, and is the Corn & Soybean Digest Trends Editor. He tracks his travels in his online column, the Road Warrior of Agriculture, which he updates at cornandsoybeandigest.com every Monday morning.
This past month, I addressed my 30th consecutive American Bankers Agricultural conference. Wow, the agrilending field and the world has changed over the past 30 years. My first conference in Nashville was with more than 2,000 lenders - ESPN and USA Today did not exist yet. Farmland prices were running in high gear with expansion in global food markets because of strong developing countries' economies. Oil prices were erratic and high, and government was seen as dysfunctional. Does that scenario sound like today?
Changes have occurred in my 30 years. We now have financial standards, ratios and benchmark comparisons. Many of you are granted credit by computerized scoring systems that identify risk. Over 40% of people conduct business with an agrilender online or through e-mail.
The industry weathered a farm crisis in the 1980s, where old-school cash flow and profit analysis were critical and made us better managers. Currently, agriculture has moved back to the financial trap of the 1980s. Moving to the future within 10 years, two-thirds of the current lenders, as well as farmers, could potentially retire, thus creating a large transition issue.
Yes, community banks will exist, along with Farm Credit and FSA. However, many new players such as international entities, or even Wal-Mart, may become your new agrilender.
RECENTLY, I SHARED the podium with Jim Garrison, a retiring executive with Mid America Farm Credit. Jim has been in the agrilending business for 28 years and has seen many economic cycles. He had a powerful message at this year's Ag Producer conference: “It is a good time to be a good farmer.”
I agree with his thoughts that some producers farm big just to farm. That is, they take on more leased ground at any cost, or purchase land that is not economically feasible. While both Jim and I have a positive view of agriculture, the operational risks are increasing.
Costs have increased significantly, both variable and fixed. Corn at $3.50, beans at $9 and wheat prices are all coming with an increased cost structure that compresses margins. There's also significant price volatility, and this is one year when undisciplined marketers made some individuals look smart.
In many areas of the country, farm programs do not provide much downside protection. With higher crop revenue insurance premiums, yields must fall more sharply before insurance coverage kicks in. Weather variations have affected yield and quality.
As Jim clearly stated, profit margins need to more than double for farmers to be in the same risk vs. reward position in 2008 compared to the 2001-2005 period.
Heed Jim's Advice:
Know your costs.
Be careful in negotiating land leases. Be fair and flexible.
Have strong risk management programs to accommodate increasing risk.
Keep the business model workable at $2.50 corn, $5 beans and $4 wheat. We are still playing in a world that's economically flat.
Dave Kohl can be reached at email@example.com.