With times getting tougher for Wisconsin’s agricultural producers, lenders are closely watching conditions and proactively reaching out to customers.

“We had a tough 2016; 2017 showed some strength in the dairy market, which was helpful. The other commodities were pretty flat – corn and soybeans. Heading into ’18, the dairy market is looking especially weak. And that’s a real concern,” said Tim Buttke, vice president of ag and commercial lending at Nicolet National Bank and chair of the WBA Ag Bankers Section.

Having meaningful conversations with customers early is important. “They’re already thinking, ‘How can we work with the bank to restructure a bit, perhaps, on payments? And how much relief does that give us?’ If we’re doing our jobs, they look at us as counselors and partners in this,” the veteran lender and former farmer said.

“Can we cut out some fat without cutting into the bone, basically, is what we discuss. Maybe scaling back a capital plan or two for the year, finding out what’s the break-even, what it’s going to take to cash-flow if milk price, for instance, is at $13.80, or say, with premiums, $15,” he continued. “You’re thinking ahead to the planting season and trying to have enough capital on hand to buy the spring inputs and go forward from there. But people don’t have a lot of working capital on hand right now, coming off this year.”

The Wisconsin ag economy – and what lenders can do to best help customers – will be the focus of the WBA Ag Bankers Conference, April 11-12 at the Kalahari Resort & Convention Center in Wisconsin Dells. (See bottom of page.)

Ag Lending Environment

Across the country, 82 percent of ag lenders said they’ve seen a decline in farm profitability in the last 12 months, according to a survey released on Oct. 31 by the American Bankers Association and the Federal Agricultural Mortgage Corp.

In the Chicago Fed district, ag credit conditions declined in the third quarter of 2017, with availability of funds for lending by ag banks down relative to a year ago for the first time in 11 years.

Repayment rates for non-real-estate farm loans were lower in the third quarter of 2017 compared with the same quarter last year, and loan renewals and extensions were higher. Remaining near their historically low levels, interest rates on farm loans moved little during the third quarter of 2017, according to the Chicago Fed.

But that could soon change, said Dr. David Kohl, professor emeritus in the Agricultural and Applied Economics Department at Virginia Tech.

“We have very tight margins, and so any movement really creates volatility in the extremes. Contrast to five years ago, if the price of corn moved, we didn’t feel it as bad as we do today,” Kohl said. “And another one that producers and bankers haven’t been accustomed to for the past 10 years is going to be interest rate volatility, because the Fed will probably raise interest rates three, if not four, times in this next year.”

Ag lenders will need to be able to convey to their borrowers how interest rate sensitivity impacts the bottom line, Kohl said.

Yet another area of volatility will be the uncertain impact that negotiations on the North American Free Trade Agreement will have on commodity prices.

“It’s going to be really critical because the net farm income from international trade is about 20 percent of our net income nationwide, and so, if those NAFTA agreements are not tweaked, we could be in extreme volatility,” Kohl said. “Let’s take a state like Wisconsin, about one in seven days of our milk is exported – 39 percent goes to Mexico – so one of the things that you could see is a dollar change in milk price very, very quickly. It could influence not only cash flows, but it could also influence land values.”

Developments to Watch

“We have been able to maintain decent milk prices in a growing national dairy herd over the previous decade due to very strong growth of U.S. dairy exports. We have not been able to maintain that trend over the previous 18 months or so,” said Dr. Marin Bozic, dairy economist in the Department of Applied Economics at the University of Minnesota and associate director of Midwest Dairy Foods Research Center.

Bozic will present his market outlook and update on ag policy, at the conference. One area he will cover is expected changes to the Margin Protection Program for dairy producers.

“The program has not been working to the satisfaction of policy makers and a large number of dairy producers, and there’s a vigorous debate happening in the halls of Congress and among the key members of the House and Senate Agriculture Committees on how to reform that program,” he said.

Another major change that will affect the ability of dairy producers to manage their risk will be changes to crop insurance programs, which Bozic will also cover.

He also pointed to the emergence of the multi-farm dairy – operations such as Milk Source in Wisconsin or Riverview Farms LLP in Minnesota – as a significant development to watch.

“Small- and medium-sized dairies are going to find it increasingly hard to compete. We typically have 3 to 5 percent attrition rate annually anyway, but the consolidation pace may pick up,” he said. “Large partnerships, these multi-family dairies, some of them are able to draw in external cash when they build their next dairy. … That is going to introduce a new supply-expansion dynamic as well.”

Future of the Farm Bill

Another topic on ag lenders’ and customers’ minds is the new Farm Bill, and that will be the focus of conference speaker Ed Elfmann, senior vice president, agricultural and rural banking policy at the American Bankers Association.

A particular area of focus for the ABA will be raising the cap on Farm Service Agency loan programs to at least $2.5 million, Elfmann said. “We want to make sure that those loan limits are set up not necessarily for right now, but for the next 10, 15, 20 years,” he said. “We’re trying to set up the loan programs not only so beginning farmers can start their own operations, which is very costly, but also for well-established farmers to make sure that their business can stay strong through potential downturns.”

Another priority for ABA is streamlining, expediting and modernizing the loan process across U.S. Department of Agriculture lending programs. “That’s how we’re going to weather through tough times, by making sure that we have all the tools available,” he said.

Good resources for bankers – especially those newer to ag lending – to review are ABA’s 10 Tips for Tough Financial Times on the Farm (www.aba.com/Tools/Function/Ag/Documents/10TipsToughFinancialTimes.pdf) and 10 Financial Tips for America’s Young and Beginning Farmers (www.aba.com/Tools/Function/Ag/Documents/AgDayTipSheet.pdf).

Importance of a Plan

Dr. Kohl, a dairy producer himself, said that it’s never been more important for farmers to have a one-page written plan.

“They need to have their goals in writing, short-term and long-term, because that makes them critically think: Do they want to be in business, how big do they want to be, do they want to scale down? And then I think one of the things that our ag borrowers are going to have to start doing is doing a projected cash flow. And, not just have the banker do it for them, because the thing is, it makes them think about production, prices, financing, marketing – and cash flow is 80 percent of a business plan,” he said.

“For us it’s going to be extremely important to understand, to offer good advice to our borrowers about the right strategy. In some cases, when there are producers that are reaching retirement age, maybe that’s the best option for them,” said Buttke of Nicolet National Bank. “It’s not easy, and it does test our skills as bankers, frankly.”

Still, it’s a good time to be an ag banker, Kohl said. “In good times, all customers think about is interest rates. In tough times, they want a relationship banker and they want an agricultural bank.”

Mahan is a freelance writer for the Wisconsin Bankers Association.

Register Now for the WBA Ag Bankers Conference

Each year, nearly 140 ag bankers from around the state attend this event to interact with peers and to learn the latest about ag policy, market trends and industry updates from nationally recognized speakers.

The WBA Ag Bankers Conference, April 11-12 at the Kalahari Resort & Convention Center in Wisconsin Dells, will feature updates from:

  • Edwin Elfmann, senior vice president of agricultural and rural banking policy, ABA;
  • Dr. Jason Henderson, associate dean and director of Purdue Extension, Purdue University – Positioning Ag for Future Profitability;
  • Dr. Marin Bozic, assistant professor, dairy foods marketing economics, University of Minnesota – Dairy Market Situation & Outlook; and
  • Dr. Matt Roberts, managing director, The Kernmantle Group – Global Economy in 2018 and Beyond; The Good News About the Ag Markets.

Click here for more information and to register!