Managing for Success in a Shifting Ag Environment · 2019-05-29 · Agricultural Economic Insights Managing for Success in a Shifting Ag Environment First Dakota National Bank Yankton,

Agricultural Economic Insights

Managing for Success in a Shifting Ag Environment

First Dakota National BankYankton, SD

Crooks, SD

Mitchell, SD

January 26-27, 2015

Dr. Brent Gloy

Ag Economic Insights, LLC

www.ageconomists.com

[email protected]

Twitter: @BrentGloy

http://www.ageconomists.com/


Agenda

•The current situation in 10 questions

•12 Strategies for Success

Download the presentation and other materials from a private website developed just for you:

http://ageconomists.com/FirstDakota


1. What is the Current Situation in the U.S. Economy and Where is it Headed?

Economic Growth

Inflation

Employment

Interest Rates


Growth Returns, but at a Moderate Rate

• Where has the growth been for the last 15 years?

• Where will it be for the next 5-10?

• Europe flirts with major, major problems

• Will Europe bring down the rest of the world?

• U.S. outlook fairly strong, given problems elsewhere

• Oil price meltdown – pros and cons


U.S. unemployment has now fallen below 6% which was the Fed’s original magic number.

It is still below what most view as full employment (5.2% to 5.5%)

Removes some pressure to keep rates low

Unemployment Headed in the Right Direction


U.S. Inflation Remains Low

• U.S. inflation rate remains below target of 2%

• U.S. banks still hold massive excess reserves

• Situation better than in most major, developed economies

• Reduces pressure to raise rates

• Don’t look for pickup until economy heats up – with ROW in slow growth, inflationary pressures likely to remain low


Source: Board of Governors of the Federal Reserve System, December 17, 2014http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20141217.pdf

Fed is Telling Us that Short-Term Rates are Likely Headed Up

• 2015 is here!

• How will markets react to higher rates?

• Look for rates to go up but probably later in the year

• Remember these are short-term rates


Source: Board of Governors of the Federal Reserve System, December 17, 2014http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20141217.pdf

How Much Might Rates Increase?

• Most FOMC members expect modest tightening

• Most don’t believe we reach long-run rates for a considerable period

• Note the WIDE range of views on rates

• Strengthening could increase value of the dollar

Take-away – Rates are likely going up, how much is anybody’s guess but most would suggest 65 to 100 BP


Longer Term Rates are Critical to Farmland

• Longer-term rates remain low and are again falling

• Reflects weak world economy IMO

• Historically, moves over 100 BP are not extremely common

• How will people react if we leave low interest rate environment?

• Very unlikely to get farmland increases through multiple expansion (either increased income expectations or reduced rates)


2. What Does Ag Profitability Look like for 2015?

Ouch!

• 2014 will be a pretty good year for most

• 2015 looks downright ugly for row crops

• Outlook has improved substantially in the last few months

• Gov’t payments will be welcomed but late

• Livestock likely to remain very profitable, but beware the differences in the livestock and crop booms


3. What Adjusts?


Margin Compression

•May get some relief on variable costs

•Will be difficult to avoid until fixed costs adjust• Rents

• Equipment

• Family living

• Land values

•Mitigating factors• Crop insurance

• Crop mix

• Government program

Bottom Line: Farmers Better Have Reserves and be Prepared for Tighter Finances than Many Have Dealt with for Years


www.ageconomists.comhttp://wp.me/p4AEa3-1Q

Immediate and Substantial Relief from Rent Reduction is Unlikely

http://www.ageconomists.com/

http://wp.me/p4AEa3-1Q


Farmers are Well Equipped!

Source: USDA Census of Agriculture


Family Living Expenses Have Increased Substantially!

Source: Compiled from Kansas Farm Management Association Executive Summaries


4. How Many Acres of Corn and Soybeans will be Planted in 2015?

• Key factors• Crop insurance

• Operating capital requirements

• Adjustment will likely come at the margins

• Implications• Spending on variable inputs

• Upside price potential

Agricultural Economic InsightsSource: NASS, States included planted at least 300,000 acres of corn

Where Will Adjustment Come From?

• U.S. increased corn plantings by 14.1 million acres over this period

• 60% from the corn belt

• Will the rest stick with corn?


Where Will Adjustment Come From?

• U.S. increased soybean plantings 3.8 million acres on average over this time period

• Most corn belt states were down to flat

• What happens in the corn belt on soybeans as well as the other regions?

(1,250,000) (1,000,000)

(750,000) (500,000) (250,000)

- 250,000 500,000 750,000

1,000,000 1,250,000 1,500,000 1,750,000 2,000,000

IA IL

MN IN

MO NE

OH SD ND KS

AR

MI

MS

WI

NC KY

TN LA VA

MD PA SC OK AL

Change in Planted Soybean Acres, 2000-2004 vs 2010-2014


Crop Insurance No Longer Guarantees Comfortable Margins

*Years that would be positive with current land rent of $295/acre** Year that would be positive with current overhead cost structure of $506/acrea 2015 corn projected price estimated on Dec 2015 (corn) and Nov 2015 (soy) futures prices as of January 14, 2015

Corn Crop Insurance Soybean Crop InsuranceYear Price Rev @ 80%

and 200 bpa

Variable

Costs

Net

Guarantee

2007* $4.06 $650 $270 $380

2008* $5.40 $864 $390 $474

2009 $4.04 $646 $441 $205

2010 $3.99 $638 $356 $282

2011** $6.01 $962 $413 $549

2012* $5.68 $909 $479 $430

2013* $5.65 $904 $477 $427

2014 $4.62 $739 $445 $294

2015a $4.09 $654 $463 $191

Year Price Rev @ 80%

and 60 bpa

Variable

Costs

Net

Guarantee

2007 $8.09 $388 $127 $261

2008* $13.36 $641 $195 $446

2009 $8.80 $422 $241 $181

2010 $9.23 $443 $195 $248

2011* $13.49 $648 $213 $435

2012* $12.55 $602 $260 $342

2013* $12.87 $618 $256 $362

2014* $11.36 $545 $240 $305

2015a $9.92 $476 $238 $238


Estimates from Texas A&M Modelhttps://decisionaid.afpc.tamu.edu/

5. What Farm Program Will Farmers Choose?

• Will provide support – likely substantial

• Timing is good for 2015 operating line repayment – not for 2014

• Lots of uncertainty about what to choose and how much to expect

• Farmers really struggling with election decision

• NOT a risk management program


5a. How Solid is the Government’s Commitment to Ag?

Large Commodity Payments

+

Large Insurance Subsidies

Large Expenditures per Farmer


6. How Much will Farmland Prices Soften?

• Cap rates remain at historical lows

• Almost no logic to support further multiple expansion

• But, long-term rates remain low and steady

• If long-term rates move, watch out


Very Hard to Push Land Values Higher

• Watch land values closely

• Support will likely depend on supply available for sale

• Economics not as favorable as recent years

• How will landowners react?

• Large amount of forced sales still unlikely

Big Land Supply Overhangs Market!Longer-Term looks Challenging as Well


7. How Much Credit Risk is in the Tails?

• Overall debt picture looks good

• How many are over-leveraged?

• How big a shock can they handle?

• High rent and aggressive farms likely becoming vulnerable

8. Can Population and Income Growth Provide Enough Demand to Keep Prices High?


Will this be enough to keep us from building substantial stocks?

Choice from Higher Income Favors Agriculture


9. What’s Next for Energy Prices?

• Big implications for ethanol and biofuel demand

• Some studies show it has largest impact on commodity prices and asset values in the long-term


Where to with Renewable Fuels?

• Right now quite profitable

• RFS is in apparent purgatory

• How much growth can we realistically expect here?


10. How, When & Does Global Uncertainty Resolve?


Perspective on the Situation


Building Your Strategy for the Shifting Environment


12 Strategies for the Margin Squeeze

1. Maintain ample cash and operating credit

2. Get fixed costs under control

3. Carefully evaluate debt structure

4. Obtain low cost of production

5. Develop and implement risk management plan

6. Consider diversification

7. Be willing to offload assets/operations

8. Make a wise government program decision

9. Moderate growth and asset ownership strategies

10. Communicate with lenders

11. Build agronomic skills and practices

12. DEVELOP A STRATEGIC PLAN


Final Thought for Navigating Today and Tomorrow’s Ag Environment

Focus on management and strategic plan

“Deploy resources today for tomorrow’s reality versus defending yesterday’s decisions”

Peter Drucker

•Goals, objectives, communication, training/development, measurement, accountability

Documents

Managing for Success in a Shifting Ag Environment · 2019-05-29 · Agricultural Economic Insights Managing for Success in a Shifting Ag Environment First Dakota National Bank Yankton,