Feature

The road ahead

Written by Steve Fairchild on .

MFA faced a gambit of challenges in 2016. Some, like low commodity prices or consolidation among crop input manufacturers, affected all of Midwest agriculture. Others, like wholesale fertilizer prices that slid downward throughout the year or increased regulatory pressure, are more specific to agricultural input suppliers. These factors combined to create general headwinds affecting profitability.

As he took the podium to deliver MFA’s financial statement at the 2016 annual meeting in Columbia, Mo., MFA Incorporated CFO Jeff Raetz pointed out that these economic headwinds were blowing throughout the industry. “I pulled a few examples from recent news,” Raetz said, “CHS recently reported a year-over-year drop in profit of 46 percent. Mosaic has idled one of their potash mines in Canada for the remainder of 2016. Intrepid, a U.S. potash producer, laid off 300 employees in July and recently announced they are laying off another 57 employees,” he added.

Even with these broad challenges in the agricultural sector, MFA finished the year showing a modest profit. The financial results for 2016 demonstrate the kind of pressure that a relatively quick economic downturn can deliver. They also show that diversity and balance sheet management can help weather the storm.

“MFA has a long, proud tradition of serving our trade territory. While we faced challenges in 2016, we fought hard to maintain our market share and to provide you, our members, with quality products at competitive prices,” said Raetz.

Financial performance

Raetz reported a pretax profit of $4.5 million for fiscal year 2016. That figure comes from the performance of a combination of MFA business entities: MFA Incorporated, MFA Enterprises and several joint ventures.

Sales results for MFA Incorporated’s cooperative business reached $930 million. MFA Enterprises is a wholly owned subsidiary of MFA Incorporated. Formed in 2001, MFA Enterprises represents non-cooperative expansion including operations in southern Iowa, southeast Kansas, west-central Missouri and northwest Missouri. For fiscal year 2016, it reached $196 million in sales.

Included in MFA earnings for the year were the company’s joint ventures. MFA has 50 percent ownership in these ventures. Cache River Valley Seed contributed $35 million in sales. AgriServices of Brunswick contributed $145 million in sales. Mid-State Seeds contributed $20 million in sales. Alliance Animal Care contributed $20 million in sales, and Central Missouri AgriService, in which MFA is a 45 percent owner, contributed $120 million in sales. Together, the joint ventures delivered $340 million in sales.

Total volume for MFA’s business entities, including joint ventures, was just less than $1.5 billion.

Grain sales

Grain sales fell in 2016 after several years of remaining near the $540 million mark. Current year’s sales numbers are based on the previous year’s harvest. The decrease in sales was due to a smaller harvest precipitated by some 1.7 million acres of prevented-planting acres. With that much idle land in the trade territory, MFA saw grain sales of $351 million on 58 million bushels in 2016. That represented a 34 percent decrease in sales and some 30 percent fewer bushels handled.

The decrease was felt industry-wide.

“If you compare the bushels of grain MFA handled to government data for acres planted and average yield, we consistently handle approximately 9 percent of the grain in our territory,” Raetz said.

Field crop sales

“As a commodity-based business, sales dollars really don’t tell the whole story. Volume shows a different trend,” said Raetz.

Total sales of plant food increased 1.8 percent to some 900,000 tons. Seed units sold increased 14.8 percent. Corn units sold rose 3.7 percent.

Raetz added that MFA’s seed offerings continue to provide excellent results in replicated plots and customer fields. As a result, MorSoy sales increased to 62 percent of total soybean seed sales compared to 53 percent the previous year. MorCorn sales increased to 37 of total corn units sold compared to 34 percent in 2015.

With acreage recovering from the previous year’s prevented planting situations, Crop Protection sales increased by 6 percent.

Livestock supply sales

Livestock supply sales (feed, farm supply and animal health) totaled $169 million in fiscal 2016, which is steady over the past few years.

Even at steady sales dollar figures, MFA increased tons of feed sold by 3.6 percent compared to a year earlier to total 356,000 tons.

“We are feeding a higher percentage of the animals in our trade territory,” said Raetz. “And MFA’s Feed Division has developed products with Shield Technology that continue to set us apart from our competition.”

Overall, animal health product sales increased by 17 percent in fiscal 2016. However, farm supply sales fell by 4 percent from last year’s record sales.

“A commodity-based business like ours will ebb and flow with the market,” Raetz said, adding that “These volume numbers show that we are growing or maintaining market share in our trade territory.”

Margins

Product margins, service revenues, joint venture earnings and patronage combined to total $205 million, an $11 million decrease compared to fiscal year 2015. Under the sluggish commodity price scenario and fewer bushels harvested, margins on grain decreased by $12 million compared to the previous year. As mentioned earlier, tighter margins on retail fertilizer margins were also a factor.

For fiscal year 2016, joint venture earnings, which tend to follow margins on agronomic offerings, were $2.5 million compared with $2 million for fiscal 2015.

Assets

Fixed assets (land, buildings, equipment and owned rolling stock) totaled $100 million, up $3 million from fiscal year 2015. This figure doesn’t account for leased equipment, which, if owned, would add $30 million to the fixed-assets column.

Total assets at the close of the fiscal year stood at $446 million up slightly over the last year, but within the trend of the past several years.

“With our strengthened balance sheet, we have been able to continue to dedicate significant resources to upgrade facilities, equipment and acquire assets in new geography,” said Raetz. “During the summer of 2016, we began construction of a 110-railcar grain loading facility in northwest Missouri. This project is a joint venture between MFA Incorporated and our good friends at MFA Oil Company. MFA Incorporated’s investment in this project is being funded by long-term debt.”

Raetz added, “I want to make sure everyone is clear—this project in no way impacts the amount that is allocated for capital expenditures each year. The biggest impact on our annual capital allocation is profits on our operations.”

Long-term debt

Raetz reported that MFA Incorporated had employed $74 million in long-term debt. It uses two primary sources of to fund it: a term loan with CoBank and the MFA Bond Program, which is unsecured debt.

“In recent years earnings on our operations have allowed us to finance acquisitions and capital items with working capital while paying down long-term debt,” said Raetz. “As I mentioned earlier, we are funding the northwest Missouri rail project with long-term debt. That project is the source of the increase in 2016. Our long-term debt will grow next year then begin to decrease as we pay down the loan.”

Total net worth increased to $157 million in fiscal year 2016. “The net worth from non-cooperative earnings or retained earnings is $102 million,” said Raetz. “Member equities are $55 million. Thanks to your support and continued patronage, MFA has built a strong balance sheet and a strong company,” he added.

Patronage

After adjusting for taxes, earnings for 2016 were $3.4 million. Of that total, some $2 million was non-patronage eligible as it came from outside of cooperative-designated earnings through joint ventures and MFA Enterprises. These earnings are not eligible for distribution. Member income was $1.4 million. While the cooperative has paid some $22 million to members since 2013, due to lack of profitability on MFA operations in fiscal year 2016, management recommended, and the MFA Incorporated board of directors voted, that there would be no patronage paid or equities retired this year.

Domestic production deduction

MFA will once again take advantage of a manufacturing deduction that falls under the IRS designation “Domestic Production Activities Deduction.”

Raetz said that preliminary calculations suggest that approximately $4.6 million in deductions are available and can be passed through to members on grain sales made to MFA during fiscal 2016.

As in years past, a notice will be sent to eligible members sometime in late spring 2017. Calendar-year taxpayers will be able to use the deduction on 2017 tax returns.

Looking forward

The challenges of 2016 are reflected in the financial report in pages following this story. “It’s not quite the year we had hoped for,” Raetz said. “But this harvest season, we were blessed with an abundant grain harvest, and as a company, we are optimistic going into fiscal year 2017 and beyond. Our plan for the coming fiscal year reflects net income after taxes of 11.9 million, but our expectations are always higher. We continue to set goals and develop operating plans to target growth and ensure the continued financial strength of your cooperative now and into the future.”

In this December/Jan 2017 issue

Written by webadmin on .

Conundrum Cuba

Written by Steve Fairchild on .

Editor’s note: Fairchild received a stipend from the American Agricultural Editors’ Association’s Professional Improvement Fund for this fact-finding trip to Cuba.

Flying into Cuba, a farm boy does what farm boys do: size up the land—the shape of fields, the color of the soil, the nature of the outbuildings. A bird’s eye view of agriculture offers great insight. As our charter flight doglegged from the Florida Straits over Havana and to the Jose Marti International Airport, the open country offered more questions than answers. I wondered why so many crop fields were isolated from others. There was no knit patchwork of crops as you see flying into arable regions in North America or Europe. The landscape was uniformly scrub land punctuated with something more organized here and there. From a Midwest viewpoint at altitude, there was an incoherency to the land. But then, for many Americans, Cuba is incoherency embodied. It is a country that since the 1960s has been an abstraction to many of us. Cuba has been politics more than place.

An object lesson about Cuba is revealed once you clear customs at Havana’s international airport. It is hard to navigate the crowd at the baggage claim. The trouble isn’t so much a sheer throng of people; it’s that movement is made difficult by the quantity of shrink-wrapped merchandise coming in from Miami. Flat-screen TVs. Furniture. Large unidentifiable blobs wrapped in plastic. You get the immediate sense that while official trade between Cuba and the United States is limited by a stringent set of rules, the freelance importer is hard at work and paying for plenty of airfare along the way. Human enterprise is irrepressible, and that’s something Cuban officials not only recognize but—slowly and carefully—seek to capitalize on. Land reforms and liberalization of private enterprises lead the way, but the Cuban government remains cagey on how quickly to unleash private enterprise and what role trade with the United States might play in the country’s evolution.

While political relations between Cuba and the United States are a long way from harmonious, there have been milestones towards normalization. The U.S. has been exporting agricultural goods to the island since 2000. And the Obama administration made significant overtures to open U.S. citizen travel to Cuba.

Because the Cuban diet features rice and poultry, farmers in MFA’s trade territory would be among those who most benefit from normalized trade. So how soon can we start selling? It’s complicated. And it’s likely to remain that way for a while.

Cuba is in a new socio-political epoch. As the 1990s began, the departure of Soviet influence and subsidies left Cuba’s post-revolutionary planned economy in free-fall. The Cuban GDP dropped by 35 percent in one year, and the country lost some 85 percent of its trade volume. For agriculture, that meant a huge decline in the availability of fertilizer, herbicide, seed and other farm inputs. For an example of how this affected both the farm and export trade, consider sugar, one of Cuba’s largest exports. Sugar production fell from 8.4 million metric tons of production in 1989-90 to just 1.1 million metric tons in 2010-11 according to the USDA. Gone was Soviet purchase of sugar at artificially inflated prices to support Cuban agriculture. In the wake of that economic shift, lack of inputs, neglected infrastructure and the ability to commit labor to farm under such difficult conditions stifled Cuba’s agricultural sector. The view from the airplane wasn’t disorganized crop fields—it was abandoned farmland. By 2008, the country was importing between 60 and 80 percent of its food supply, representing an unsustainable cost.

Cubans call the time directly after the Soviet departure the “Special Period.” It was a time of critical economic want and food shortages. Government officials and citizens alike told us that no one wants a return of those conditions. To avoid future food shortages, and just as importantly, to avoid the cost of importing food, the government has implemented multiple land reforms and liberalized food policies since the 1990s.

One early reform allowed the formation of agricultural cooperatives. Under these cooperatives, the state retains ownership of the land, but allows some autonomy on the farms and provides credit for purchase of inputs. Under more recent reforms, the government is offering 10-year farming options on 33-acre parcels. Land is available to anyone who wants to farm it, but there are annual production benchmarks to meet if the producer intends to keep the “lease.” And production is taxed.

We visited a cooperative organic farm called Organopónico Vivero Alamar (Alamar Nursery) on the outskirts of Havana. The cooperative was formed in 1997 as a project to feed the surrounding neighborhood and has grown from an 800-square foot garden to a 27-acre farm. Vivero Alamar is led by Miguel Ángel Salcines López, a former government agronomist, who told us that the adoption of organic methods in Cuba was a necessity coming out of the Special Period. “It was proven,” he said, “Either we produce organically or we starve.” In the mean time, Salcines has honed the organic techniques employed on the farm and believes that if trade with the United States normalized, Cuba would stand a chance to provide the United States with organic produce. Today, Vivero Alamar employs 120 people and delivers some 300 tons of vegetables to market each year.

A visit to Vivero Alamar provided ground truth that cooperative farms can be successful under the Cuban government, but there are distinct challenges ahead if the government intends to make continued concessions to private enterprises and collect taxes as part of the bargain.

Jorge Mario Sánchez Egozcue, a Cuban economist from the University of Havana, told us that to understand the challenges, first you must become accustomed to the complexity. In implementing taxes in a planned economy, the government is pushing a new reality, a different socio-economic reality on a population that has never paid taxes. “When a person has never paid taxes in their life, he is accustomed to believe that is the reality of the world,” he said. “How do you build a taxpayer culture overnight? How do you introduce a new tax system? It has to be a very simple one in order to be understood by everyone and applied effectively.”

Sánchez said that for new economic realities to work, the population must support them. The change needs to come from both the decision-makers and the citizens. “You don’t build autonomy just because you say it. You don’t build competitiveness just because you want it. You don’t build confidence just because somebody tells you that you have to. So you own the land, you have the credit, you have everything you need. It doesn’t mean that you’re going to behave as a competitive, efficient producer. The more likely scenario is you will continue to preserve the old habits in a new environment with new language.”

Sánchez said all this not as a critic of change, but as a long-time observer of economics both in Cuba and abroad. Regardless of pace or expected outcome, when the state is in charge of business, the reforms will have to begin as a state decision.

Tourism’s cash could lead the way

Part of the Cuban state’s decision-making paradigm is led by the potential for tourism, but a conundrum looms. There are American investors actively seeking agreements on the island. Tourism brings hard cash, yet tourists in the millions will put additional pressure on home-grown food supplies, potentially increasing the amount of imported food. Increased food purchases from other countries would exacerbate unsustainable import costs to the national budget, running up deficits and further eroding the ability for the Cuban government to find favorable credit. Under current restrictions, U.S. agricultural products sold into the Cuban market must be purchased using cash or through third-party guarantees from foreign banks.

You can see why credit is an critical factor going forward. At every turn, from farmer and government official alike, Cubans told us they need two things to improve their economy: an end of the U.S. embargo and the ability to purchase imports with credit.

Even if the economics line out, however, the Cuban government is wary of an uncontrolled influx of tourists and development. Our group was told by several speakers that Cuba is much more than sun, fun and mojitos. Another recurring theme was that a McDonald’s around every corner is not the future for Cuba. Still, the lure of tourism cash and what it would portend for the economy seemed central to thinking about the future in Cuba.

What it could mean for U.S. agriculture

Perspective is required to understand Cuba as an export market versus Cuba as a political issue. The country is big for the Caribbean but small in comparison to other U.S. agricultural export markets. About the size of Pennsylvania, Cuba has some 11 million people. Eleven million people is a rounding error when we talk about China’s population and export potential, yet Cuba’s proximity to the United States gives our market a distinct edge in logistics and delivery costs for agricultural exports. The United States was a leading exporter to Cuba before 1960. Of course when you talk about then and now, you are leaping over a chasm that has lasted a couple of generations. Pre-revolutionary Cuba was among the top 10 destinations for U.S. agricultural exports. Back then, rice, lard, pork and wheat flour were the leading exports. Cuba was sometimes our largest rice customer, purchasing about a third of our total exports. In today’s prices, 1958 agricultural trade volume to Cuba would be more than $600 million. If Cuba were to purchase as much rice now as it did then, the country would be in our top 10 export destinations for the crop—and, as mentioned previously, at a tremendous delivery advantage.

The Trade Sanctions Reform and Export Enhancement Act, implemented in 2000, provided certain exemptions to the embargo for U.S. agricultural exports. In the following years, agricultural exports to Cuba climbed steadily, jumping to approximately $700 million by 2008, partly as a result of Hurricane Ike. U.S. exports have since fallen, however, due to the cash-only trade restrictions seen as too onerous by Cuban officials.

The question is, what happens next? Will Cuban economic reforms last? If so, will they grow the Cuban economy past its near stasis? Will U.S.-Cuban relations relax enough to allow tourism and food imports? Injections of credit and capital into the Cuban economy could create a different picture for U.S. exports.

The ebb and flow of political tides

Not too long after our return from Cuba, the U.S. election ramped up to its most tumultuous pitch with a Trump administration emerging. A few weeks later, Fidel Castro died. What these events augur for U.S.-Cuban relations is speculation at this point. Regardless of how the two nations’ political status proceeds, governments across the world are negotiating with Cuba on a number of fronts.

Our group’s base of operations was the Hotel Nacional de Cuba, a historic Havana fixture and host to celebrities and diplomats. Early in our trip we noticed a serious-minded security contingent on hand. It belonged to President of Iran Hassan Rouhani, who was also staying at the hotel. According to reports from Granma, Cuba’s state newspaper, Rouhani was there to reaffirm “friendly ties” between the two countries and discuss the importance of food production. Later during our trip, a satellite truck set up at the hotel to beam news home to Japan. Japanese Prime Minister Shinzo Abe met with Raul and Fidel Castro on our last day in Cuba, reportedly to discuss expanding trade relations.

There are no vacuums in trade or world politics. 

Get back in the black

Written by Nancy Jorgensen on .

After several years of low commodity prices, is your financial statement showing red ink? The downturn may last a while. How can you get back in the black, or at least hang in there until things turn around? In our annual outlook report, we call on four experts to forecast the 2017 farm economy and dispense advice on how to get through tough times.

1. What do you see for grain prices in 2017?

Gerke: This year looks better than last for farmers in our area. We experienced another wet spring, but most farmers got crops in the field. Later moisture came at the right time. Yield looks good, but grain prices are expected to remain where they were last year unless some major event occurs.

Boehlje: Futures markets suggest continued weak prices. We won’t see $5 corn, and beans will not be in the teens. Historically, agriculture goes through cycles like other industries. Good times last three to fives years—sometimes up to seven. But for farmers, bad times can last twice as long. It’s not going to get better anytime soon unless bad weather someplace in the world improves our forecast.

Westhoff: Large global supplies of grain and oilseeds make it likely that corn, soybean, wheat and rice prices will continue to be under pressure in 2017. Corn and wheat prices for the 2016-17 marketing year could be the lowest in a decade. The market will be sensitive to prospects for 2017 crops in the southern hemisphere early in the year. As we saw in 2016, a short South American crop can boost the market, but if Brazilian production rebounds, it will be harder for prices to recover. If 2017 brings average global weather conditions, crops may be a bit smaller than in 2016, and prices could increase a little. But it would take a major supply problem to get us back to prices like 2010-13.

Liddell: An 87 percent year-over-year increase in soybean carry stocks, a 39 percent YOY increase in corn carry stocks and a 12 percent YOY increase in wheat carry stocks will start 2017 off in a bearish mood. Substantial supplies usually mean that any market rally will be muted by increased cash sales. Consequently, the first half of the year looks challenging from a price perspective. With no changes in supply and demand dynamics, Chicago Board of Trade prices should remain from $3.20 to $3.50 per bushel for corn, $9.25 to $10 for soybeans and $4.20 to $4.50 for wheat. Over the past three years, the best pricing opportunities have come at planting time, and 2017 is expected to be similar. Much will depend on the South American harvest.

2. What about livestock?

Boehlje: We’re not feeling as positive about a turnaround in the animal protein industry as we were six months ago. Exports aren’t growing at the pace we hoped. Demand from China hasn’t been as strong as expected for pork, and it’s not clear a turnaround will come quickly. Beef especially is recovering slowly from the demand downturn that came with the Great Recession. Feeder cattle prices are down substantially, but they’ll likely at least stabilize at today’s lower levels. On the brighter side, feed costs are down.

Westhoff: Increasing production of beef, pork and chicken in 2016 contributed to sharply reduced cattle prices, and hog and chicken prices dipped far below their 2014 peaks. Even if lower prices cause producers to slow expansion, the number of cattle in the system means beef production will probably increase again in 2017. Unless export demand is stronger than appears likely, 2017 could bring another price decline for fed and feeder cattle. Hog prices could be near break-even.

Gerke: Hog prices look weak, and cattle will trend even to down—but it depends on demand. Exports this year so far seem to be doing well despite the strong dollar. The world needs food, but how much can other nations afford?

3. How will domestic and export demand affect farmers?

Westhoff: We have seen record or near-record world production of the main grains and oilseeds for three years in a row, in part because of favorable weather in most major growing regions. Low prices will slow or reverse expansion in many countries, but as always, weather will drive yields. On the demand side, if the global economy continues to grow at a modest pace, we expect continued increases in meat and dairy consumption in 2017, especially in China and other middle-income countries. However, export growth does not appear strong enough to cause a quick and sharp commodity price recovery.

Liddell: South America acreage could still expand. This year, due to the drought of Brazil’s second crop, Brazil and possibly Argentina are likely to focus expansion on corn. Financial challenges for U.S. producers are expected to have the opposite effect, driving us away from corn and toward soybeans, which roughly carry half the cost of production. Regardless, current global production capacity is capable of maintaining the already strong global stocks positions of all major grain and oilseeds. U.S. exports are strong in the outset of the 2016-17 marketing year, partially as a result of Brazil’s drought.

4. Will profitability return?

Boehlje: Profitability will decline almost 50 percent from our peak two years ago. This is one of the most dramatic declines we’ve seen—even more than in the 1980s. Recovery will come from cost reductions. How much cushion do you have to withstand this downturn? Smart farmers stashed cash, but if you bought equipment and land, you burned up working capital and don’t have much resiliency. Grain producers won’t see profits increase from reduced production because harvested acreage has already grown up to 10 percent since 2010. Prices must drop dramatically before we back off on acres.

Westhoff: Income faces continued pressure. Low commodity prices mean crop and livestock receipts will likely remain well below recent peaks, in spite of increased production. Government payments under the new farm bill will offset only a small portion of the decline in crop receipts. On the cost side, fuel and fertilizer prices will likely remain low by recent standards. Farmers will continue to reduce costs. Still, most will struggle with tight or negative profit margins.

Liddell: Row-crop farmers face the third to fourth year of negative margins. The key question: How low can you push the cost of production without damaging the crop or the land’s long-term capacity?

5. How much are land values declining?

Gerke: Missouri land values have declined by about 10 percent. There are two reasons it’s not dropping more—low interest rates and heavy demand. Investors are trying to find a place to put their money, and real estate seems to be a good bet.

Westhoff: Reduced profitability usually translates into lower rental rates and land values. USDA confirmed a decline in rental rates in 2016 in many states, and the national average value of farm real estate declined a little after increasing by 50 percent between 2007 and 2015. Further reductions are likely in 2017 unless commodity prices recover significantly. Land values could come under additional downward pressure if the Federal Reserve carries through with plans to increase interest rates.

Liddell: Rental values are feeling pressure to decrease. As a consequence, total land value is coming under more downward pressure as well. A number of auctions report no sales, and we see a lack of interest in mid- to low-quality land in Missouri, Illinois and Iowa. In the coming year, there is an increasing chance that land will be liquidated to generate cash for farming operations. This has already started, and increased land sales can force total values down further.

6. How can renters and landlords strike deals that work for both?

Westhoff: Be realistic. Although some adjustments have already occurred, some tenants appear to be paying more for rents than current profitability justifies on the hope that commodity prices will rebound. This strategy is risky.

Boehlje: Overall we’ll see a 20 to 25 percent total decline in land values, and we’re halfway there. Rent prices come down more sluggishly. Landlords are moving away from sharing risk and toward cash rent. We will see a lot of churn. Landlords expect a certain income for their retirement. At the same time, most tenants need a downward adjustment. This is one of the toughest decisions a renter faces: at what price can I continue to rent? Some will have to walk away. Grain farmers who rent will be the most financially vulnerable. Farmers who didn’t want to pay high land prices but aggressively bid up rents will hurt the most. Some mid-career farmers bid up rents to expand—many purchased modern equipment to farm the additional acres and don’t have the cash reserves or land base to refinance. A high proportion of young and beginning farmers rent land, and they will also be affected.

My advice is to negotiate. Flex rents might present a solution, where you set a base price and share any profitability improvements later. But landlords may not accept the idea.

Gerke: Tenants should discuss revenues with landlords. Share your expenses and explain where your rent needs to be to make your cash flow work. Cash rents are high—it never got as crazy in Missouri as it did in Iowa, Indiana and Illinois, but some tenants are still bidding up rent. Many landlords are putting out their land for bid, and some are getting more for it. Some tenants try to hold onto their rental property hoping they’ll be first in line when the landowner sells. That can work if the landlord sells while he’s alive, but if the landlord dies, heirs may not be open to the concept.

Liddell: As margins will likely continue to be tight over the next two years, it is important to establish a viable value for land. You can accomplish this through transparent negotiation or a lease agreement that passes some risk to the landowner. The tenant should initiate regular communication with the landlord. The landlord needs to understand the value that land can generate. Overpriced land generally ends up with depleted nutrient levels and increased weed and pest problems. If the tenant is unable to pay higher rent, the landlord may need to farm the land himself. This will become more common as credit tightens.

7. How can farmers manage debt?

Boehlje: Individual farmers may face challenges, but nothing like the 1980s when farmers were underwater on land borrowings. Farmers today are not as highly leveraged, land prices haven’t gone up as much, and interest rates are lower. Credit will tighten, but we won’t see widespread problems. Lenders aren’t likely to foreclose, and refinancing will be available. Still, lenders are nervous, and loan reviews will be intense. Lenders will ask more questions: What are you doing to manage risk? Have you talked to your landlord? What’s your cost of production? What’s your working capital burn rate? How will you cover losses?

Westhoff: Some farmers are experiencing repayment problems. Many operations made money between 2010 and 2014, and debt-to-asset ratios fell to favorable levels. In these cases, farmers used reserves to handle a year or two of sharply reduced returns without excessive financial stress. However, with continued low returns, pressure is building. Farmers and lenders need to be realistic—don’t rely on a quick, large rebound in commodity prices. Make small changes now to avoid drastic changes later.

Gerke: In many cases these days, your primary lender won’t loan enough for you to operate, and expects you to obtain supplier financing. MFA Incorporated provides short-term credit for inputs such as fertilizer and seed. We see an increase in demand for this type of credit. We have met the demand, in part because we send some of it along to programs such as John Deere Financing or RaboBank. If you don’t have enough cash flow to service short-term loans, ask your lender to extend loan maturities, thus lowering your payment.

Liddell: After three years of lower commodity prices and persistently high input costs, liquidity is drying up. Credit is harder to secure, and lenders are less likely to take as much risk as in the previous ten years. Repayment has been an issue over the past year and is expected to be more of a problem in 2017. To manage debt, you must understand your equity position. What assets are available to secure credit, and how much liquidity can you create by selling assets? Your business plan should take into account how you can apply valuable assets strategically. When you secure a crop loan with hard assets like land, you run the risk of losing the land’s value. Cash is king, especially in a downturn.

8. What’s your top trend for 2017?

Boehlje: Financial pressures will be top of mind. Longer term, the mergers and acquisitions in the pipeline will prove significant: Bayer and Monsanto, Dow and DuPont, Deere and Precision Planting, ChemChina and Syngenta, and the Potash and Agrium consolidation in Canada. We probably won’t see the impact until late 2017, but with less competition, what will happen with pricing and availability of products, along with new product research and development? Another trend: digital agriculture, such as the cabless automated tractor, will profoundly change how we farm.

Gerke: Lenders want to see more working capital. Long-term lenders will favor farmers who can pay real estate loans with income generated by that land. Some require 50 percent equity before they’ll finance.

Liddell: The key trend will be the farmer’s financial health. The other trend to watch: U.S. planted acres; fewer acres would be positive for farmers. Low grain prices relative to soybean prices, combined with a lower total cost to produce soybeans, are expected to drive increased soybean acres and reduced corn and wheat.

9. What’s your best advice for the coming year?

Westhoff: Don’t panic, but be realistic.

Gerke: The more cash you have, the longer you can survive the downturn.

Boehlje: One, control your costs. Two, build the financial resilience to handle the downside. Three, all downturns bring opportunities for some people. Well-positioned operators will see more opportunities to rent or buy land and to capture good deals on buying or leasing used machinery.

How to get back in the black

  • Start by cutting your most significant costs—machinery and rent. These make up 35 percent or more of all costs for most grain farmers. –Boehlje
  • Lower your input costs. We expect fertilizer prices to decline, which may help. Seed prices haven’t dropped, but you might opt for lower-cost seed. Keep buying good genetics because production is what counts, but you might buy fewer traits. However, if a bug shows up, you’d better have a backup strategy. –Boehlje
  • Cut back on family expenses. Studies show that discretionary spending doubled over the last five to seven years. Don’t replace the car, and put off expensive vacations. Ask your kids to take out student loans rather than you putting up the cash—interest rates on student loans are attractive, and you may be able to pay them off in a few years. –Boehlje
  • Focus on reducing costs per unit of production, rather than cost per acre or per animal. If cutting fertilizer application by 10 percent has little impact on production, that might make sense, but if it reduces current or future yields quite a bit, it might not be smart.  –Westhoff
  • Refinance long-term interest rates—they’re extremely low now. –Gerke
  • Look for alternative financing sources. Input merchants and dealers are preparing to handle more debt. Total debt will rise on the operation and machinery side, but will not go up much on the land side except to support refinancing of losses and restore working capital. –Boehlje
  • Plan based on cash flow rather than on reducing income taxes. Don’t purchase machinery just to defer taxes. –Gerke
  • Find new sources of income. Take a job off the farm or custom harvest for neighbors. –Boehlje
  • Develop a business plan that clearly states your objectives and addresses key elements such as cost of production, available equity and cost of living. Sit down with advisors and vendors such as your banker, marketer, accountant and agronomist to strategically plan for the future. They can help execute your plan if they are included in the process. –Liddell
  • Market throughout the year to glean better prices. Stop marketing to generate cash at critical times. Utilize market “carry,” along with storage, to enhance your crop’s value. –Liddell

In this November 2016 Issue

Written by TF staff on .

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