The annual WBA Agricultural Bankers Conference was held earlier this month, April 10-11 in Wisconsin Dells. Over 170 attendees, including bankers, exhibitors, sponsors, and speakers, gathered to hear from expert speakers and network with their peers in the ag banking industry. Here are a few highlights from my time at the conference.
Dr. Mark Stephenson, director of dairy policy analysis from the University of Wisconsin-Madison, led off the conference providing the dairy outlook. A strong U.S. economy has helped use up some of the milk supply but we still need to export one day's worth of milk per week to support present milk production. Tariffs and trade wars have been and will continue to be a headwind to contend with. Dr. Stephenson discussed a few reasons why this down cycle has been so long. Some of those reasons are that there are 20% of dairy producers that are still cash flowing and that there are 60% of producers who have either borrowed funds or restructured debt to maintain working capital and keep producing, leaving 20% who are in real trouble. As a result, supply has been slow to respond to the low prices.
Reasons for optimism are that U.S. cheese consumption per capita continues to increase, from 12 lbs per person in 1970 to 37 lbs per person last year. For comparison, Germany and France average 50 lbs of cheese consumption per person, so there is still room for more U.S. consumption. China averages 23 lbs of total dairy product consumption per year per person, with the world average being at 111 lbs, and the U.S. average at 640 lbs, so there is a lot of potential for future exports and more world total consumption as economies of countries around the world develop and improve.
In summary. Dr. Stephenson is forecasting a $1.00 to $1.20 per cwt increase in milk price in 2019 compared to 2018 but raised a question for all to think about, that question was “is this present economic environment that we have been experiencing over the past five years ($14.00 to $17.00 class III average prices) of possibly being a new normal range?”
Dr. Matt Roberts, founder of the Kernmantle Group, which is an economics and research and training consultancy, spoke in regards to the grains. Dr. Roberts mentioned that the stock to use ratios are tightening but are still at very high levels. Feed usage is expected to increase a little due to slightly improving beef margins and improving hog margins. Ethanol usage of corn is expected to be down a little in 2019. Weather scares and trade disputes will continue to play into the markets as before. Dr. Roberts mentioned that strong yields in 2019 will allow some producers to maintain or improve their balance sheets. A takeaway that Dr. Roberts mentioned is that it’s a good time to remind farmers that the key to marketing success is not trying to time the market, but instead to have profitable sales orders identified and placed into the market. At times, the 2018 market had profitable prices available and the 2019 market will have that also. But the question is will farmers take advantage of those opportunities?
Doug Lund from the Farm Service Agency spoke on what FSA is seeing in its portfolio of direct and guaranteed loans and also provided some direction and expectations as to where that’s heading and what bankers can do to utilize and maximize its participation and positive experiences with FSA Programs.
Curt Covington, executive vice president – chief credit officer from Farmer Mac, spoke on some things to think about and to do to help you manage your portfolio in these tough times. Covington spoke about setting up a graph with "collateral" on the vertical axis and "cash flow" on the horizontal axis. Then label the four quadrants as follows: the upper left quadrant as "refinance or soft exit," the upper right quadrant as "acceptable," the lower left quadrant as "settle" and the lower right as "restructure." Then place your portfolio, client by client, in the appropriate position in each quadrant, as this will help you in identifying, managing and servicing your portfolio. Covington discussed characteristics of each quadrant and the type of client that would fit in each. Communication between the lender and the borrower is critical in all situations, and to always summarize all critical meetings in writing as to what was discussed and who is responsible for what actions going forward.
The conference was a great place to learn from some very good speakers and also to catch up with your fellow bankers. There were also many exhibitors and sponsors providing very valuable information and products for you and your bank that were available to talk to. The conference was a great way to recharge and I highly recommend it. Next year's conference is scheduled for April 15-16 at the Kalahari in Wisconsin Dells. Please save that date on your calendar, and I am looking forward to seeing you there.
Donald Adams is senior vice president of agribusiness banking with BMO Harris Bank, NA, in Green Bay and currently serves as the Chair of the WBA Agricultural Bankers Section Board.