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'80s Revisited?
Will This Recession Produce Another Farm Crisis ?
By Rita Brhel
P&D Correspondent
EDITOR’S NOTE: This story is Part 1 of 2 on the effects of the recession on farming.
———
In the months leading up to the presidential election, the biggest question on the minds of voters — including area farmers who had enjoyed two years of inflated grain prices fueled by a booming ethanol industry, before watching the markets begin to fall this summer — was, who between Obama and McCain had the best strategy for fixing the current economic environment.
“Americans, in the farm community in particular, have felt their finances quake, affecting everything from commodity prices to input costs,” said Marcia Zarley Taylor, executive editor with the Omaha-based agricultural news service DTN, which teamed up with The Executive Program for Agricultural Producers in bringing a webinar on the financial fallout to producers across the nation earlier this week.
Zarley Taylor likened the economy to the 9-11 terrorist attacks, in that this recession will make its mark on history and will likely change the way the world’s economy works.
“The New York Times said it best,” she said. “It feels like the day after Sept. 11: We know the world is different, we just don’t know how.”
What farmers need to realize, though, is that, unlike 9-11, this recession won’t be over shortly and is likely not as severe as it’s going to get.
So said David Kohl, professor emeritus in agricultural finance and small business management at Virginia Tech and nationally renowned consultant to the ag lending and banking industry — the featured speaker for the webinar.
The economy, here in the United States and across much of the world, is turning upside down, Kohl said.
“It reminds me of the old song ‘Crazy’ by Patsy Cline,” he said.
Two-thirds of the world’s economy is in recession, including not only the United States but also Europe and Japan, Kohl said. India, Russia, and China’s economies are slowing, and should China — after years of building up their global buying power — go into negative growth, the recession will turn global. Until then, consumers and businesses will see extreme volatility, in both costs and revenue, followed by periods of calm, followed by another period of swings in the market place, and on and on.
What Does this Mean for Producers?
The effect of a prolonged or global recession on farmers and ranchers would be huge, spurring a 1980s type of farm crisis, Kohl said. Without doubt, though, agricultural producers are already feeling a belt around their financial security — a belt Kohl believes will get much tighter before it begins to loosen.
For sure, farmers will not be able to get credit as easily as they have in the past few years, Kohl said.
“Credit institutions are going to be much more selective in 2009,” he said. “A year ago, lenders were lending up to 90 percent on land. Now, it’s 60 to 65 percent.”
The problem won’t be limited to land notes, but some farmers may have trouble even securing their operating loans for next year, especially those with negative financial trends in their records, he said. All producers will need to work harder to build a case for why banks should loan them money.
“A number of lenders will be going income-cash flow-oriented and looking at earned net worth,” Kohl said.
Credit scores will become valuable in the ag lending environment, and any farmer applying for a loan needs to have a score better than 650, he said.
“Credit’s going to be available, but it’s going to be much more selective than anytime since the 1980s,” Kohl said. “More and more [banks] are going to offer credit at a variable rate, and if you demand a fixed rate, it’s going to be at a substantially higher interest rate.”
Credit will probably also be offered for shorter terms, and producers will need to curb their tendency to ask for money whenever they feel like it, he said.
“We’re going to have to jump through more hoops,” Kohl said.
A credit crunch may lead some producers to seek financing through less-reputable, unsecured creditors. Bad idea, Kohl said. These creditors are more likely to go bankrupt. The better solution is to plan for a possible smaller operating loan within the farm budget, focus on making sound business decisions, and to put greater emphasis on marketing.
“People who have the marketing plans are going to be the winners,” Kohl said.
It’s Going to Come Down to Management
Ag lenders will be looking harder at producers’ management skills as a key factor in who gets credit and who doesn’t, Kohl said.
“Certain agricultural producers get it; some of them don’t,” he said.
In general, “the better [farmers] are getting better, and the worse are falling behind,” Kohl said. The reason for this spreading margin comes down to management strengths. The strongest farmers will be those with credit scores more than 700, a debt-asset ratio of less than 40 percent, a working capital ratio of more than 33 percent, and an operating expense-revenue ratio of less than 70 percent.
Farmers need to make some adjustments in the way they run their operation if their credit scores are 650 to 700, they have a debt-asset ratio of 40 to 60 percent, their working capital ratio is 15 to 33 percent, and/or their operating ratio is 70 to 80 percent.
Farmers with an even lower credit score and working capital ratio, and higher debt-asset ratio and operating ratio, are in real trouble. These farmers would have little chance if the recession does continue into a worldwide problem.
For farmers looking to get back on track, Kohl advised that they use the 60-30-10 Rule, in that 60 percent of the profits goes towards improving efficiency, increasing growth, and reducing debt; 30 percent goes toward boosting capital; and 10 percent goes toward the farmer’s choice.
In the current financial environment, debt management becomes much more of a priority, so Kohl also recommended that all farmers pay particular attention to trying to reduce the principal on their loans.
Will Any Good Come Out of This?
If there is a silver lining to this economic meltdown, it’s that advancements in efficiency in agricultural production will be swift and great, Kohl said. He spoke of seeing varieties of corn this year that grew 12 feet tall in only four months and on only one-quarter inch of water. More of this is what is to come, he said.
“You won’t believe what’s going to hit us in terms of technology in the next few years,” Kohl said.
Signs of a Farm Crisis
What could bring on another 1980s-type farm crisis? David Kohl outlines these factors that, if they occurred at the same time as a worldwide recession, would cause a meltdown in the agricultural industry:
• Higher taxes;
• Reduced tariffs on imports;
• Reduced subsidies on alternative energy;
• A shortage of economic liquidity worldwide;
• Ag lender entrenchment;
• Backlash from the media and public, and
• A strengthening U.S. dollar.
Sustainable Farm Management Strategies
Many farmers manage their farms in reaction to their emotions, particularly greed and fear. But to be sustainable, David Kohl said producers need to rely more on strategies that promote long-term financial sustainability. Strategies that can work on any farm include:
• Learning to live on a modest income;
• Seeking out and accepting assistance in management;
• Learning to be more flexible with change;
• Putting emphasis on marketing and management, equating them with profit;
• Creating a business plan;
• Managing natural resources;
• Improving your emotional IQ;
• Managing the farm through a whole-systems approach, versus a components approach;
• Actively plan for possible scenarios;
• Incorporate the strengths of the younger generation, which often include more ability to work in a team, more marketing know-how, and a more relaxed perspective toward change.
Looking ahead to next week: Are experts predicting long-term bear markets for agricultural commodities, and what can farmers do in response to the market forecast? Check out Part 2 of this series in next week’s edition of Neighbors.
———
In the months leading up to the presidential election, the biggest question on the minds of voters — including area farmers who had enjoyed two years of inflated grain prices fueled by a booming ethanol industry, before watching the markets begin to fall this summer — was, who between Obama and McCain had the best strategy for fixing the current economic environment.
“Americans, in the farm community in particular, have felt their finances quake, affecting everything from commodity prices to input costs,” said Marcia Zarley Taylor, executive editor with the Omaha-based agricultural news service DTN, which teamed up with The Executive Program for Agricultural Producers in bringing a webinar on the financial fallout to producers across the nation earlier this week.
Zarley Taylor likened the economy to the 9-11 terrorist attacks, in that this recession will make its mark on history and will likely change the way the world’s economy works.
“The New York Times said it best,” she said. “It feels like the day after Sept. 11: We know the world is different, we just don’t know how.”
What farmers need to realize, though, is that, unlike 9-11, this recession won’t be over shortly and is likely not as severe as it’s going to get.
So said David Kohl, professor emeritus in agricultural finance and small business management at Virginia Tech and nationally renowned consultant to the ag lending and banking industry — the featured speaker for the webinar.
The economy, here in the United States and across much of the world, is turning upside down, Kohl said.
“It reminds me of the old song ‘Crazy’ by Patsy Cline,” he said.
Two-thirds of the world’s economy is in recession, including not only the United States but also Europe and Japan, Kohl said. India, Russia, and China’s economies are slowing, and should China — after years of building up their global buying power — go into negative growth, the recession will turn global. Until then, consumers and businesses will see extreme volatility, in both costs and revenue, followed by periods of calm, followed by another period of swings in the market place, and on and on.
What Does this Mean for Producers?
The effect of a prolonged or global recession on farmers and ranchers would be huge, spurring a 1980s type of farm crisis, Kohl said. Without doubt, though, agricultural producers are already feeling a belt around their financial security — a belt Kohl believes will get much tighter before it begins to loosen.
For sure, farmers will not be able to get credit as easily as they have in the past few years, Kohl said.
“Credit institutions are going to be much more selective in 2009,” he said. “A year ago, lenders were lending up to 90 percent on land. Now, it’s 60 to 65 percent.”
The problem won’t be limited to land notes, but some farmers may have trouble even securing their operating loans for next year, especially those with negative financial trends in their records, he said. All producers will need to work harder to build a case for why banks should loan them money.
“A number of lenders will be going income-cash flow-oriented and looking at earned net worth,” Kohl said.
Credit scores will become valuable in the ag lending environment, and any farmer applying for a loan needs to have a score better than 650, he said.
“Credit’s going to be available, but it’s going to be much more selective than anytime since the 1980s,” Kohl said. “More and more [banks] are going to offer credit at a variable rate, and if you demand a fixed rate, it’s going to be at a substantially higher interest rate.”
Credit will probably also be offered for shorter terms, and producers will need to curb their tendency to ask for money whenever they feel like it, he said.
“We’re going to have to jump through more hoops,” Kohl said.
A credit crunch may lead some producers to seek financing through less-reputable, unsecured creditors. Bad idea, Kohl said. These creditors are more likely to go bankrupt. The better solution is to plan for a possible smaller operating loan within the farm budget, focus on making sound business decisions, and to put greater emphasis on marketing.
“People who have the marketing plans are going to be the winners,” Kohl said.
It’s Going to Come Down to Management
Ag lenders will be looking harder at producers’ management skills as a key factor in who gets credit and who doesn’t, Kohl said.
“Certain agricultural producers get it; some of them don’t,” he said.
In general, “the better [farmers] are getting better, and the worse are falling behind,” Kohl said. The reason for this spreading margin comes down to management strengths. The strongest farmers will be those with credit scores more than 700, a debt-asset ratio of less than 40 percent, a working capital ratio of more than 33 percent, and an operating expense-revenue ratio of less than 70 percent.
Farmers need to make some adjustments in the way they run their operation if their credit scores are 650 to 700, they have a debt-asset ratio of 40 to 60 percent, their working capital ratio is 15 to 33 percent, and/or their operating ratio is 70 to 80 percent.
Farmers with an even lower credit score and working capital ratio, and higher debt-asset ratio and operating ratio, are in real trouble. These farmers would have little chance if the recession does continue into a worldwide problem.
For farmers looking to get back on track, Kohl advised that they use the 60-30-10 Rule, in that 60 percent of the profits goes towards improving efficiency, increasing growth, and reducing debt; 30 percent goes toward boosting capital; and 10 percent goes toward the farmer’s choice.
In the current financial environment, debt management becomes much more of a priority, so Kohl also recommended that all farmers pay particular attention to trying to reduce the principal on their loans.
Will Any Good Come Out of This?
If there is a silver lining to this economic meltdown, it’s that advancements in efficiency in agricultural production will be swift and great, Kohl said. He spoke of seeing varieties of corn this year that grew 12 feet tall in only four months and on only one-quarter inch of water. More of this is what is to come, he said.
“You won’t believe what’s going to hit us in terms of technology in the next few years,” Kohl said.
Signs of a Farm Crisis
What could bring on another 1980s-type farm crisis? David Kohl outlines these factors that, if they occurred at the same time as a worldwide recession, would cause a meltdown in the agricultural industry:
• Higher taxes;
• Reduced tariffs on imports;
• Reduced subsidies on alternative energy;
• A shortage of economic liquidity worldwide;
• Ag lender entrenchment;
• Backlash from the media and public, and
• A strengthening U.S. dollar.
Sustainable Farm Management Strategies
Many farmers manage their farms in reaction to their emotions, particularly greed and fear. But to be sustainable, David Kohl said producers need to rely more on strategies that promote long-term financial sustainability. Strategies that can work on any farm include:
• Learning to live on a modest income;
• Seeking out and accepting assistance in management;
• Learning to be more flexible with change;
• Putting emphasis on marketing and management, equating them with profit;
• Creating a business plan;
• Managing natural resources;
• Improving your emotional IQ;
• Managing the farm through a whole-systems approach, versus a components approach;
• Actively plan for possible scenarios;
• Incorporate the strengths of the younger generation, which often include more ability to work in a team, more marketing know-how, and a more relaxed perspective toward change.
Looking ahead to next week: Are experts predicting long-term bear markets for agricultural commodities, and what can farmers do in response to the market forecast? Check out Part 2 of this series in next week’s edition of Neighbors.
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| Market Insider: The Art Of Speculation | Farm Families, Like Others, Can Learn To Be Content |
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