It was standing room only at the American Bankers Association National Agricultural Bankers conference here on Sunday to hear professor emeritus and ag banking consultant David Kohl. More than 750 attendees (the most in the past 15 years) from 27 states are registered for the three-day conference.
Bankers are worried about the drop in farm profits and the repayment capacity of their borrowers. Kohl observed what makes this downturn different:
1. The numbers are bigger. “A 10,000- to 12,000-acre operation can go upside down $3 million to $4 million quickly,” Kohl noted.
2. Volatility is greater. Price swings, market factors — it’s all more volatile now. “You need to be on top of this stuff before it gets out of hand and it can get out of hand quickly,” Kohl said.
3. Concentration of debt is greater. “Much of the debt is in fewer hands,” Kohl explained. “We don’t have a farm debt problem. We have a debt concentration problem.”
4. Interconnectedness of debt is greater. “Some of your borrowers might also own the local John Deere dealership or the local grain elevator,” he noted.
5. Trade and global risk. Kohl thinks this is one of our biggest risks. “When the Ukraine problem arose, rail cars switched to carrying energy, not grain,” he said. “China’s slow-down in corn imports has a large impact on prices.”
6. Bankers are complacent about the build-up in collateral. “Their five C’s of lending are collateral, collateral, collateral, collateral, collateral,” which earned a chuckle from the audience. Kohl continued, “If it’s a one-year downturn, repayment will be impacted. If it’s a two- or three-year downturn, liquidity will be affected. If we see five years of lower prices, collateral will be impacted.”
Bankers will have to be more than money providers in the years ahead. “You’ve got to be a teacher, coach and facilitator,” advised Kohl. “Problems start in the ‘go, go’ cycle and education starts in the ‘whoa, whoa’ cycle.” Kohl predicts issues will start before financial reports reflect trouble. He advised bankers to be out on farms once a month. “Make sure that ‘full bin’ is really full.” Bankers shouldn’t spend all their time on the 4% of borrowers in trouble, he said. They need to monitor their borrowers who are current on payments.
LIQUIDITY WILL BE A PROBLEM
Kohl quoted Dale Nordquist, with the Center for Farm Financial Management at the University of Minnesota, who gave a presentation to the bankers earlier in the day, “How to grow working capital: 1. Make money. 2. Don’t spend it all.” Then Kohl outlined ways to boost repayment capacity.
“These are lessons we learned in the ’80s,” he explained:
1. Cut business cost. “Get better before you get bigger. Attack your four biggest expenses,” advised Kohl. One Minnesota banker who farms on the side told DTN he bought conventional seed corn this fall rather than seed with stacked traits and cut his seed bill in half.
University of Minnesota economist Nordquist showed a sample 1,250-acre corn/soybean farm from their database of 3,600 farms in 11 states’ Farm Business Management Associations. By staying with its current 2/3 corn-1/3 soybean rotation, he estimated total 2015 net farm income at a loss of $25,000 on the sample farm. By switching that to a 2/3 soybean-1/3 corn rotation, net income improved to a loss of $6,000 for the 1,250-acre operation. That included a $40-per-acre Farm Service Agency payment on the corn base and no crop insurance payment.
2. Seek non-farm revenue. This helped in the 1980s, but may not be as helpful now, said Kohl. “Our operations are too large. It’s hard to find an off-farm job that pays enough to cover debt payments.”
You can sell assets but farmers may run into huge tax consequences, warned Kohl.
3. Cut living withdrawals. “When asked, farmers say they spend $30,000 to $40,000 on living expenses. But when we looked at the actual numbers, they were spending $80,000 to $90,000,” Kohl said. He believes about one in five grain producers spends more than $200,000 in family living costs.
“One Nebraska banker told me a young western Nebraska farmer invited the banker to the farmer’s condo overlooking the University of Nebraska’s football stadium in Lincoln. He had over $1 million invested in the condo and he could name eight other farmers with similar condos,” Kohl reported.
“This one [category] might be a tough one for your borrowers,” Kohl recognized. “As my dad told me, ‘It’s difficult for a cat to go from eating cream to eating skim milk. The cat will leave home.'”
4. Restructure debt. This is the easy one, said Kohl. Put debt on longer term. Free up cash to improve working capital.
Kohl has been coming to the ABA agricultural bankers conference for 37 years. He is still optimistic about the future if lenders take this cycle in stride. However, one of his concerns going into the next downturn is the age and experience of bank regulators. “At a meeting I was at recently in Denver, five out of the six bank regulators had less than two years’ experience,” he said. Hopefully, there are still some people around who remember the lessons learned in the 1980s.