The 2018 ABA National Agricultural Bankers Conference provided the opportunity to hear from several industry professionals. Many of them discussed trade uncertainties and provided similar outlooks. It is predicted that by 2050 two-thirds of the population will live in urban areas and the trend for those with higher incomes will be to spend it on animal-based proteins. The new NAFTA has made changes to trade partners and lowered tariffs which should benefit the markets. However, talk of double the soybean stocks, from one year ago, and China’s report of significantly higher corn stocks has put additional strain on the market. The government has stated there will not be any bailout for low commodity prices in 2019.
Beth Ford, CEO of Land O’ Lakes, spoke about her mission to advance their coop into the next generation through four dimensions; crops, animal nutrition, dairy foods, and stewardship. With the average size of their patron farm operations increasing 41% from 2012-2018, they currently process 12-13 billion pounds of milk a year. Research plots total 600 spread out in several areas around the world as they work to optimize crop production.
FSA provided an update on potential increases to loan limits which are dependent on a new farm bill. Talks indicate the possibility of guaranteed loan limits increasing to $1,750,000 with direct loan limits up to $600,000. They also talked about issues related to staffing and consistency between offices. Environmental review continues to be a hot topic with discussions being had about procedure and implementation.
Fluid milk consumption in the United States had decreased 3% since 2014, with just one-tenth of total production being exported. Cheese exports remain flat and domestic cheese use is up 2.5% year over year, however, cheese prices are down approximately $1.30 compared to generally stronger prices this time of year. Cow numbers are finally starting to decline, down about 32,000 head from last year. The cost of production for Midwest dairies has increased compared to Western dairies who purchase most of their feed, due to the cost of crop production.
Farmers and bankers alike need to have a good understanding of local cattle, crop, and real estate markets. They need to evaluate cost of production and know their breakeven prices. Cost control can be a hard concept to explain to farmers if they are not already aware. It is important they understand how to calculate their cost of production and know the areas that can and need to be changed to control their expenditures. As bankers, it is our job to help them understand their financial position to try and avoid a continued loss of money and equity.
Equity burn rate is calculated using market cost adjustment of 20%, real estate adjustment of 20% and a 25% chattel discount. Calculating equity burn rate is a very good way to help farmers understand just how quickly they will burn through their equity if they continue without any changes. Evaluation of on farm management is also very important. Do they know and understand their financial situation? Are they taking a proactive approach to marketing and price protection or are they just hoping for higher prices? Are they making necessary adjustments to the current markets as the new normal? Cost control can be difficult to understand and implement, however, farmers should strive for 5% cost reduction on many of their operating expenses rather than just focusing on a few key items.
In today’s market, price protection is more important than ever. Global trading uncertainty means smaller windows of opportunity to catch the up side of the market. Data shows farmers who market their products are more profitable. However, the majority sell their commodities in the bottom one-third of the market with only 7% taking advantage of marketing opportunities. For some, technology can be a deterrent when it comes to marketing their products. Leaning on the younger generation for assistance with the technology can be very beneficial. Farmers and bankers need to understand the tools that are available. They need to make connections with those they can trust to provide advice and help make important financial decisions. It is important to establish a level of trust between the farmer and the banker. Bankers need to be fair and honest. They need to build trust through clarity, compassion, character, competency, commitment, connection, contribution, and consistency.
Chris Schneider is a member of the WBA Agricultural Bankers Section Board of Directors and Vice President - Senior Agricultural Banking Officer with Investors Community Bank in Manitowoc.