Road Warrior

Where is the Risk?

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Many of you have faced this summer’s drought and its implications. Of course, crop insurance was a key player in this year's economics, and some producers whose land received moisture at the proper times and proper levels benefited from solid yields at very strong prices. Land values and cash rents continue to rise as profit expectations are capitalized into land prices.

Let us look at the risk perspective of the ag lenders enrolled in the Farm Credit University Commercial Agricultural Lender class. Granted, these participants are from east of the Mississippi, but their thoughts will bring some insight on how risk in agriculture varies by sector and region of the country.

First, many are livestock lenders, lending to beef, dairy, swine and poultry operations. Negative margins, or margin inversion, were the themes of risk identified. Many commented that these sectors failed to have a long enough duration of profits and cash flow to make up for losses from the last downturn. It is quite evident that these extreme cycles require a manager who has a profit plan with emphasis on building liquidity for abrupt changes in the profit cycle. In my travels, I have heard that one of the biggest concerns is the loss of resources from the livestock industry. Many comment that there is much less risk and more profit potential in the grain industry, with less time and intensity required. In the long run, a strong livestock sector is the foundation for the viability of the grain industry.

All of you who have observed your farmland values appreciating over the past two decades may find the following to be a surprise risk. Many ag lenders are noticing that real estate appraisals are showing lower values than tax assessments. This can result in loans that are upside-down; that is, the loan balance is greater than the value of the real estate, or the loan-to-value ratio exceeds 100%. In some cases, farm real estate values have dropped 50-60%, resulting from a loss of development potential created during the recent financial crisis. Could this ever happen in the Midwest if the commodity boom was derailed?

Another risk the lenders mentioned was loss of traditional and part-time farmers’ non-farm jobs, and salaries that are not maintaining cost-of-living increases due to inflation. Some lenders are finding that medical cost issues and credit card debt are raising their ugly heads again, also.

Competition from other countries and substitute products are also risks that were mentioned impacting the strawberry and blueberry sectors, timber and dairy. Finally, the lenders mentioned that customers are having difficulty analyzing their real financial performance and true profitability.

The bottom line is that risk in the agriculture industry is bimodal. For the livestock, poultry and nursery sectors, it is about survival to the next profit window. For the grain industry, focus is on availability and access to land, in addition to profit management.

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

 

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Dave Kohl is an ag economist specializing in business management and ag finance. He can be reached at sullylab@vt.edu.

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