Ag Finance Situation Overview Rodney Jones, Ph.D. Oklahoma Farm Credit Chair In Agricultural...

Ag Finance Situation Overview

Rodney Jones, Ph.D. Oklahoma Farm Credit Chair

In Agricultural Finance, OSU Dept. of Agricultural Economics

Some National Statistics

• USDA U.S. Net Farm Income

– 2013 $123.7 Billion

– 2014 $91.1 Billion

– 2015 $58.3 Billion (projected)

• 36 % drop in 1 year, 53 % drop in 2 years

Concerning Indicators

• Total Debt held by U.S. Ag Sector / NFI

– 2015 6.3/1 (projected)

– Recent years well under 4/1

– Have to go back to 1980’s to find a 6/1

• Proved to be one of the “early warning” signs of the 1980’s (started to increase to levels above 5/1 in 1977

Concerning Indicators

• Short-term (operating) loan volume up significantly in the last Quarter

– Up 24% from a year ago

– It’s the “big” loans (over $100,000).

• Total Ag debt up 9.5%

On The Other Hand!!

• Average Balance Sheets are much stronger

– Current average D/E about 15%

– Averaged about 20% in late 70’s, peaked at 28.5% in 1985

On The Other Hand!!

• Interest rates are much lower that the era prior to the last significant downturn

• Right now very few delinquency concerns

Global Considerations

• Significant pockets of economic sluggishness

– Brazil, China, etc.

– Will likely continue to ripple through ROW, and will impact U.S.

– Stronger dollar makes it tougher to compete for export markets

Oklahoma Agriculture, Two Very Different Circumstances

• Cow-Calf sector

– Still very strong calf prices from historical perspective, most producers enjoying strong profits

• The rest of Oklahoma Agriculture

• Of course, these two groups are not mutually exclusive

Message From Producers

• 2011 – 2012 Drought, but high crop insurance guarantees, kept incomes up

• 2013 High crop prices, rising cattle prices

• 2014 Record setting cattle prices, still relatively high crop prices

– Not a widespread indication of concern

Message From Producers

• 2015 “Dr. Jones, what do you figure is the BE yield for wheat planted now??”

– Read between the words

• 2015 “Dr. Jones, this sugar cane aphid problem sure makes Grain Sorghum tough to pencil??”

– Read between the words

Crop Budget Realities

• Break-even yield for a wheat budget to cover total costs is around 45 bushels per acre!!!!!

– Some “low cost” producers may beat that

• Break-even yield for Grain Sorghum planted this spring looks like it will be 65 to 85 bushels per acre, 80 to 90 for corn

Message From Producers

• “I’m a little concerned”

– Multiple years of crop production issues

– Low prices

– Lingering drought concerns

– The edge coming off of calf prices, etc.

A Little Concerned!!!!!!

Will We See The True Picture

• The cash accounting performance measures that most producers use and that we rely on are likely to lag true performance. Perhaps by as much as 2 to 3 years as inventories are sold down, pre-payments of expenses are reduced, equipment purchases cease, etc.

• Ripple effects, Monsanto reducing workforce 12%, Deere sales down 25% etc.

First Indicators Will Be Liquidity (Cash Becomes Tight)

• Operating loans up

• Concerns about Machinery and Equipment debt.

North

east

Lake

Corn

Belt

North

ern

Plai

ns

Appa

lach

ian

Sout

heas

t

Delta

Sout

hern

Pla

ins

Mou

ntai

n

Pacific

Unite

d St

ate.

..-0.5%

0.5%

1.5%

2.5%

3.5%

4.5%

5.5%

6.5%

USDA Yearly Percent Change in Land Values

January, 2015

• Farm Real Estate Value, 2015 (% change)

• 6.8%

• -1.1%

• -1.8%

• -5.9% • -

0.3%

• 5.5%

• -2.2%• -1.0%

• 8.1%

• 12.1%

• N/C

• 1.2%

• 1.4%

•2.

9%

• -0.9%

• 4.9%

• 3.4%

• 9.5%

• 4.9%

• 6.7%

• 3.5%

• -1.9%

• 4.8%

• 5.5%

• N/C

• > 20

• 10-19

• 1-9

• <1

• USDA-NASS data

• 3.6%

• 8.0%

• 3.4%

• 4.6%

• 1.1%

• 1.0%

• 7.0%

• 3.2%

• 4.7%

•2.

9%

• 4.3%

• -0.2%

• 1.6%

• 11.1% • 0.

7%• 0.

9%

• 1.6%

• 1.4%

• 1.2%

• 0.5%

• Cropland Value, 2015 (% change)

• 5.7%

• -2.5% • 1.

0%

• -6.3%

• -0.6%

• 4.4%

• -2.1%• -

2.2%

• 8.1%

• 8.7%

• -0.4%

• 1.2%

• 2.1%

•0.

9%

• 2.6%• 5.

0%

• 1.9%

• 8.0%

• 9.5%

• 3.8%

• 1.0%

• -0.7%

• 4.8%

• 5.4%

• N/C

• >10

• 1-9

• <1

• USDA-NASS data

• 3.5%

• 2.7%

• 4.0%

• 4.6%

• 1.1%

• 1.2%

• 3.5%

• 4.8%

• 5.3%

•-

0.7

%

• 1.1%

• -2.4%

• 1.2%

• 2.8%

• 3.8%

• 0.9%• N/A

• Pasture Value, 2015 (% change)

• 16.3%

• 18.8%

• -1.7%

• -5.9%

• 4.4%

• 13.3%

• -3.3%• 6.9

%

• 5.4%

• 14.0%

• 3.1%

• 1.9%

• 2.9%

•-

0.2

%

• -1.9%

• 3.6%

• 1.4%

• 4.4%

• 1.3%

• 6.7%

• 1.6%

• -5.6%

• 4.1%

• 5.5%

• N/C

• >10

• 1-9

• <1

• USDA-NASS data

• 1.3%

• 1.2%

• 4.8%

• 1.0%

• 2.2%

• 1.9%

• 2.5%

•2.

0%

• 7.2%

• -1.3%

• 1.0%

• 7.5%

• 1.4%

• N/A

• USDA-NASS

19982000

20022004

20062008

20102012

20140

1,000

2,000

3,000

4,000

5,000

US and OK Land Values

US Pasture Land ValueOK Pasture Land ValueUS Cropland ValueOK Non-irrig Cropland Value

$/a

cre

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

0

1

2

3

4

5

6

7

8

9

10

Years to Pay for an Acre of Land at 30 BushelYield per Acre

First Indicators Will Be Liquidity (Cash Becomes Tight)

• What’s a producer to do?

– Manage Cash Flow

– Manage Assets

– Manage Liabilities

What’s A Producer To Do

• Manage Cash Flow

– Family living, supplemental income, delay purchases, negotiate rents, etc.

– Ability to respond will be farm specific

Kansas Farm Management Association Data

20042005200620072008200920102011201220132014 $-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

Non-Farm Income Net Farm IncomeTotal Family Living

What’s A Producer To Do

• Manage Assets

– Sell least productive assets (remember, machinery and equipment values are often the first to decline)

– Delay replacement purchases

– Lease out underutilized equipment

What’s A Producer To Do

• Manage Liabilities

– Negotiate interest only payments for a year

– Term out operating debt

– Refinance at lower rates

– Etc.

What’s A Producer To Do

• Manage Risk

– Lock in low interest rates

– Manage production risk with higher levels of crop insurance

First Indicators Will Be Liquidity (Cash Becomes Tight)

• What’s a lender to do?

– “Shock test” loan portfolio more aggressively

– Try harder to sort out true accrual profits

– Require more information regarding the long term business plan and the risk management plan at renewal time

– Require interim budget vs actual performance reporting

Questions???

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