Tag Archive for: Agricultural Banking

By Nicholas Felder

“Ladies and gentlemen please make sure your seat belt is securely fastened and your seat backs and tray tables are in their full upright position.” As many of us know, these instructions are for the safety and soundness of all those aboard commercial aircraft during what might not be a perfect landing. Well, we might all want to heed that advice and reiterate that to all our customers as soon as possible.

As of the date of this article, the American grain producer is facing $6.60 corn (which oscillated from $4.85 to $7.60 down to $5.65 now $6.60) and $13.94 soybeans (same $12.50, then $15.85, then $12.85, then $14.75, now $13.94) which isn’t all bad! However, all the pilots (and the passengers alike) who are flying across the 2022 crop year aren’t exactly sure where the runway is located and in what condition it stands. As they peer down towards harvest and post-harvest, they must deal with a dense layer of fog comprised of inflation, a strengthening dollar, global unrest, weather, mid-cycle fall elections, and the USDA’s export sales reporting system that went down just as these markets couldn’t get any more volatile. Basis spreads between new and old crops are leading the charge to what looks like a pre-harvest rally. However, the Dow and S&P markets are falling precipitously, leading some experts to believe a demand drag on domestic use is the next big hurdle for the 2022 and 2023 crop marketing cycles. Sell now or later? And, if that wasn’t enough, producers and lenders looking at the 2023 growing/feeding/milking year are facing decisions on things like fertilizer and chemical pricing, even before the ’22 crop really starts to turn away from its summer green. Can we really achieve a “soft landing” of any fashion in this environment? It’s the question both farmers and politicians are struggling to answer.

Change and interruption are inevitable in a global and electronic economy. Too many hands in the pot waiting to grab their “fair share,” while people and animals across the globe fight to find their next meal. However, preparation and a good commodity marketing offense is the best defense for headwinds of the nature noted above. It really all begins with cash flows that are created well before final planting decisions made. Then, regularly updating the living, breathing document as itemized expenses change or planting and crop maintenance is completed so it can be an accurate tool to price whatever commodity being produced. These strategies don’t have to be complex; just planned and emotionless. Nickels saved through discipline and, many times, luck create opportunities to land as softly as anyone is able in today’s environment. A producer can’t farm next year if he doesn’t make it through this year.

We all know that equity may be the key to growth, but liquidity is the key to longevity. As we transition into the autumn harvest season, your fellow banking professionals ask that you be that trusted advisor who is slightly risk averse, but supportive of growth and profitable ventures. There is still money to be made and balance sheets will improve if producers are intentional in their actions and lenders the same. The sky can be prevented from falling if we work together!

Thank you all for your service to the industry, diligence and support of America’s producers, and presence within your local communities. Wishing all a safe harvest season!

Nicholas Felder is vice president, commercial and ag banking, with MidWestOne Bank in Lancaster. Felder currently serves on the WBA Ag Section Board of Directors.

By Lance Lansing, Wisconsin Bank & Trust

While many of us were alive when interest rates reached the record high of 20% in March of 1980, not many of us were in lending at that time. According to bankrate.com, the inflation rate at the time was 14.6% and Fed used their main tool and increased interest rates to combat inflation. As a result, the U.S. central bank manufactured a recession to bring prices back down. Although I have never claimed to be an economist (or played one on TV), it does not take a Harvard grad to see that the Fed is once again using its main tool to combat inflation. The current Fed, instead of wielding a sledgehammer on rates, is much more subtle by slowly and gradually moving rates in one direction. However, desperate times…etcetera.

The Fed has chosen to raise interest rates six times over the past year with four straight three quarter point increases pushing borrowing costs to a new high since 2008. The March 2022 hike of a quarter point was the first hike since 2018. The Fed has chosen to raise interest rates with the objective of reducing the total amount of money circulating through the economy, called the money supply. The Fed also tries to control the money supply through quantitative easing, which is the process of buying and selling Treasury Department backed assets. Both tools are used by the Fed to try to reduce inflation. Inflation can be caused by many factors. It is generally the result of too much demand and insufficient supply, leading to high prices. Many people received excess funds during the pandemic and along with supply chain disruptions, this has resulted in rising demand for items, an inability to get those items and an increase in the cost for those items.

A Fed manufactured recession will affect us all in many ways personally and professionally. High inflation and rising interest rates will likely erode a farm business’ liquidity. While our producers have been paying attention to the increase in commodity prices and resulting revenue, they have also noticed the quickly rising input costs due to increased inflation. Should commodity prices start to decline, costs may remain elevated and be slow to go down. Profit margins will be compressed, and some may even become negative. The Ag economy will see new risks with the rising interest rates and input costs. The direct impact on farmers that are borrowing money will be significant. For example, a line of credit that has risen 3.75% from 4.75% to 8.5% since March of 2022 with an average balance of $1,000,000, will require a monthly interest payment of $7,083 vs. $3958, adding an additional $37,500 per year interest expense to their cash flow. This will, of course, impact repayment capacity, liquidity, and depending on the operation, increase cost of production to a level that will compress margins and seriously impact their operation’s profitability.

Many operations chose to increase their liquidity during the pandemic through higher commodity prices and government program payments to pay down dept. However, rising input costs and possible tax liability will increase demand for short-term borrowing. With the increased demand of short-term loans comes the risk of increased variable rates. If margins compress, more operations will seek out loans to compensate for the short falls.

Another risk from higher interest rates is the impact on expansion. When a neighbor’s farm comes up for sale, the cost per acre of owning that land has jumped significantly. A loan early in 2022, with a fixed rate at 4.25% over a 20-year amortization would now hold an interest rate of 8%. Most producers would be tempted to jump at an opportunity to buy 100 acres of adjacent land for $10,000/acre. Since most operations are asset rich and cash poor, the producer in this example will opt to finance 100% of the purchase. The total cost of $1,000,000 for 100 acres, would equate to an annual cost per acre of $747 at 4.25% vs. $1,012 at 8%. This $265 cost per acre increase would impact repayment capacity and margin. The impact of record high land values and increase in interest rates may result in producers passing on expansion opportunities and focusing on deleveraging and positioning themselves for a change in the economy.

Producers and lenders will be affected by the rate increases in several ways. The profit margins for both could be adversely affected as well as the number of opportunities for new loans and growth. Navigating this time will depend on how much higher the rates will increase and for how long before a hiccup in the economy brings them back down.

Lance Lansing is vice president of commercial and ag loans with Wisconsin Bank and Trust in Monroe. Lansing also currently serves on the WBA Agricultural Bankers Section Board of Directors.

By Steven Thomas, BMO Harris Bank, Onalaska

Playoff football, tournament volleyball, and cross country meets dominate the local sports scene. Like many, I am heavily invested in my own community’s success this year with an Onalaska football squad still undefeated and advancing to Level 3 of the playoffs for the first time in 20+ years. This past Saturday, I was fortunate to watch three of our runners compete in the WIAA State Cross Country meet in Wisconsin Rapids. Our hometown favorite, Manny Putz, an Onalaska sophomore, won the D1 WIAA Cross Country meet on a beautiful day posting a 0.2 second margin of victory after an all-out sprint in the last 200 meters to the finish of the 5,000 meters run. From the Braveheart like battle charge at the sound of the starting gun to watching the final sprints at the finish. It is a pleasure to watch these gifted athletes give their all.

Like these runners, farmers are on their annual race to the finish of the 2022 harvest season. Travels across the Midwest reveal steady progress in the corn and bean crop bringing in above average yields in areas that received adequate moisture, below average in areas where moisture was dryer conditions prevailed. Corn that is not drying down quickly coupled with higher drying costs are expected to eat into profit margins.

Dryer conditions this fall have made for good harvesting conditions with few weather delays experienced. The annual ritual of fall applied dairy-generated fertilizer is certainly noticeable around the countryside. Fall seeded cover crops and winter grains have mostly been planted.

During this harvest season, beyond the yields coming in, the biggest discussion with clients has been related to end of year planning. Despite all the inflationary pressures, supply chain disruptions and high costs, most clients are looking at solid returns this year. End of year tax strategies will certainly be implemented in the next 2 months as farmers look to mitigate anticipated tax obligations. Meet with the accounts early to develop the plans appropriate for each operation. Tax rates could be adjusted and paying some of the tax burden this year when cash is more readily available can be one consideration. We do anticipate supply chain issues and transportation challenges will continue which could impact chemicals and fertilizer availability that are likely to be prepaid.

Political ads are dominating the airwaves with every candidate trying to make their best case for themselves and make their opponent look as bad as possible. I have my own opinions on those I’ll be supporting with my vote. Fortunately, the election is only a few days away and the ads will stop, but the task of governing in a bipartisan manner with legislative solutions that find common ground and benefit the common good seem to be harder and harder to reach. Your vote is important. Local races, school boards, town boards, school funding referendums all matter. I encourage all to cast your ballot in this very important mid-term election.

Steven Thomas is vice president of agricultural banking with BMO Harris Bank in Onalaska. Thomas also serves on the WBA Agricultural Bankers Section Board of Directors.