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Ag Finance Situation Overview
Rodney Jones, Ph.D. Oklahoma Farm Credit Chair
In Agricultural Finance, OSU Dept. of Agricultural Economics
Some National Statistics
• USDA U.S. Net Farm Income
– 2013 $123.7 Billion
– 2014 $91.1 Billion
– 2015 $58.3 Billion (projected)
• 36 % drop in 1 year, 53 % drop in 2 years
Concerning Indicators
• Total Debt held by U.S. Ag Sector / NFI
– 2015 6.3/1 (projected)
– Recent years well under 4/1
– Have to go back to 1980’s to find a 6/1
• Proved to be one of the “early warning” signs of the 1980’s (started to increase to levels above 5/1 in 1977
Concerning Indicators
• Short-term (operating) loan volume up significantly in the last Quarter
– Up 24% from a year ago
– It’s the “big” loans (over $100,000).
• Total Ag debt up 9.5%
On The Other Hand!!
• Average Balance Sheets are much stronger
– Current average D/E about 15%
– Averaged about 20% in late 70’s, peaked at 28.5% in 1985
On The Other Hand!!
• Interest rates are much lower that the era prior to the last significant downturn
• Right now very few delinquency concerns
Global Considerations
• Significant pockets of economic sluggishness
– Brazil, China, etc.
– Will likely continue to ripple through ROW, and will impact U.S.
– Stronger dollar makes it tougher to compete for export markets
Oklahoma Agriculture, Two Very Different Circumstances
• Cow-Calf sector
– Still very strong calf prices from historical perspective, most producers enjoying strong profits
• The rest of Oklahoma Agriculture
• Of course, these two groups are not mutually exclusive
Message From Producers
• 2011 – 2012 Drought, but high crop insurance guarantees, kept incomes up
• 2013 High crop prices, rising cattle prices
• 2014 Record setting cattle prices, still relatively high crop prices
– Not a widespread indication of concern
Message From Producers
• 2015 “Dr. Jones, what do you figure is the BE yield for wheat planted now??”
– Read between the words
• 2015 “Dr. Jones, this sugar cane aphid problem sure makes Grain Sorghum tough to pencil??”
– Read between the words
Crop Budget Realities
• Break-even yield for a wheat budget to cover total costs is around 45 bushels per acre!!!!!
– Some “low cost” producers may beat that
• Break-even yield for Grain Sorghum planted this spring looks like it will be 65 to 85 bushels per acre, 80 to 90 for corn
Message From Producers
• “I’m a little concerned”
– Multiple years of crop production issues
– Low prices
– Lingering drought concerns
– The edge coming off of calf prices, etc.
A Little Concerned!!!!!!
Will We See The True Picture
• The cash accounting performance measures that most producers use and that we rely on are likely to lag true performance. Perhaps by as much as 2 to 3 years as inventories are sold down, pre-payments of expenses are reduced, equipment purchases cease, etc.
• Ripple effects, Monsanto reducing workforce 12%, Deere sales down 25% etc.
First Indicators Will Be Liquidity (Cash Becomes Tight)
• Operating loans up
• Concerns about Machinery and Equipment debt.
North
east
Lake
Corn
Belt
North
ern
Plai
ns
Appa
lach
ian
Sout
heas
t
Delta
Sout
hern
Pla
ins
Mou
ntai
n
Pacific
Unite
d St
ate.
..-0.5%
0.5%
1.5%
2.5%
3.5%
4.5%
5.5%
6.5%
USDA Yearly Percent Change in Land Values
January, 2015
• Farm Real Estate Value, 2015 (% change)
• 6.8%
• -1.1%
• -1.8%
• -5.9% • -
0.3%
• 5.5%
• -2.2%• -1.0%
• 8.1%
• 12.1%
• N/C
• 1.2%
• 1.4%
•2.
9%
• -0.9%
• 4.9%
• 3.4%
• 9.5%
• 4.9%
• 6.7%
• 3.5%
• -1.9%
• 4.8%
• 5.5%
• N/C
• > 20
• 10-19
• 1-9
• <1
• USDA-NASS data
• 3.6%
• 8.0%
• 3.4%
• 4.6%
• 1.1%
• 1.0%
• 7.0%
• 3.2%
• 4.7%
•2.
9%
• 4.3%
• -0.2%
• 1.6%
• 11.1% • 0.
7%• 0.
9%
• 1.6%
• 1.4%
• 1.2%
• 0.5%
• Cropland Value, 2015 (% change)
• 5.7%
• -2.5% • 1.
0%
• -6.3%
• -0.6%
• 4.4%
• -2.1%• -
2.2%
• 8.1%
• 8.7%
• -0.4%
• 1.2%
• 2.1%
•0.
9%
• 2.6%• 5.
0%
• 1.9%
• 8.0%
• 9.5%
• 3.8%
• 1.0%
• -0.7%
• 4.8%
• 5.4%
• N/C
• >10
• 1-9
• <1
• USDA-NASS data
• 3.5%
• 2.7%
• 4.0%
• 4.6%
• 1.1%
• 1.2%
• 3.5%
• 4.8%
• 5.3%
•-
0.7
%
• 1.1%
• -2.4%
• 1.2%
• 2.8%
• 3.8%
• 0.9%• N/A
• Pasture Value, 2015 (% change)
• 16.3%
• 18.8%
• -1.7%
• -5.9%
• 4.4%
• 13.3%
• -3.3%• 6.9
%
• 5.4%
• 14.0%
• 3.1%
• 1.9%
• 2.9%
•-
0.2
%
• -1.9%
• 3.6%
• 1.4%
• 4.4%
• 1.3%
• 6.7%
• 1.6%
• -5.6%
• 4.1%
• 5.5%
• N/C
• >10
• 1-9
• <1
• USDA-NASS data
• 1.3%
• 1.2%
• 4.8%
• 1.0%
• 2.2%
• 1.9%
• 2.5%
•2.
0%
• 7.2%
• -1.3%
• 1.0%
• 7.5%
• 1.4%
• N/A
• USDA-NASS
19982000
20022004
20062008
20102012
20140
1,000
2,000
3,000
4,000
5,000
US and OK Land Values
US Pasture Land ValueOK Pasture Land ValueUS Cropland ValueOK Non-irrig Cropland Value
$/a
cre
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
0
1
2
3
4
5
6
7
8
9
10
Years to Pay for an Acre of Land at 30 BushelYield per Acre
First Indicators Will Be Liquidity (Cash Becomes Tight)
• What’s a producer to do?
– Manage Cash Flow
– Manage Assets
– Manage Liabilities
What’s A Producer To Do
• Manage Cash Flow
– Family living, supplemental income, delay purchases, negotiate rents, etc.
– Ability to respond will be farm specific
Kansas Farm Management Association Data
20042005200620072008200920102011201220132014 $-
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
Non-Farm Income Net Farm IncomeTotal Family Living
What’s A Producer To Do
• Manage Assets
– Sell least productive assets (remember, machinery and equipment values are often the first to decline)
– Delay replacement purchases
– Lease out underutilized equipment
What’s A Producer To Do
• Manage Liabilities
– Negotiate interest only payments for a year
– Term out operating debt
– Refinance at lower rates
– Etc.
What’s A Producer To Do
• Manage Risk
– Lock in low interest rates
– Manage production risk with higher levels of crop insurance
First Indicators Will Be Liquidity (Cash Becomes Tight)
• What’s a lender to do?
– “Shock test” loan portfolio more aggressively
– Try harder to sort out true accrual profits
– Require more information regarding the long term business plan and the risk management plan at renewal time
– Require interim budget vs actual performance reporting
Questions???
• If you would like to be added to the list for our Ag Finance electronic newsletter, send me an email at [email protected]
• Join us on Facebook at OSUFarmManagment
