Some tensions ease for ag bankers while others persist

Recent years have brought challenges, but certain tensions have started to ease for farmers and ranchers throughout the Midwest, as well as for the ag bankers they partner with, to keep their farms going.

The supply chain issues that began with the pandemic in 2020 are easing for some products, such as fertilizer, though they still exist in terms of finding new equipment or getting quick repairs. Used equipment sales are solid. Land values are another positive, remaining quite strong in many parts of the region. 

Yet, rising inflation and rate hikes have had an impact on the bottom line, forcing some in agriculture to pinch pennies.

Just like with the weather, there’s a push and pull between the high and low points. In the case of the weather, that balancing act includes a drought in some areas last year and a lot of snow and cold through the winter. 

The unpredictability makes crop insurance a must-have benefit as farmers experience the issues of the present day while planning for a future of change.

“There will be a significant generational transfer of farm assets and institutional knowledge at banks,” said David White, senior commercial relationship manager at INTRUST Bank in Wichita, Kan. “It will be important for producers and bankers to have open lines of communication to ensure a successful transition in the years to come.”

Ag bankers from several states across the region shared their thoughts about recent months and the year ahead, including White; Bradley Sesser, president of Casselton, N.D.-based BankNorth; Douglas Smith, president and CEO of Griggsville, Ill.-based Farmers National Bank; Eric Ide, senior vice president of Cozad, Neb.-based Homestead Bank; Scott Zimbelman, CEO of Homestead Bank; and Clay Redding, ag loan officer at Forsyth, Mont.-based First State Bank.

How have the continued FOMC rate hikes/rising inflation affected your lending and ag customers? Given the high cost of inputs, and now the higher cost of credit, can the farmer make enough money to get by? 

Inflation, rising interest rates and high input costs will certainly make it more difficult for producers to see a return on their investment. 

While input costs have seen price reductions, most producers locked in their fertilizer and seed prior to year-end at higher costs. Opportunities to forward-contract at profitable levels are still available. The producers who know where their break-even point is, and are willing to contract at those levels, should be able to get by.  

As is always the case, Mother Nature will need to cooperate. In eastern North Dakota, wet conditions in 2022 kept most producers out of the fields until mid- to late May. The moisture then shut off. A lot of areas saw very little or zero rain from July through September. Subsoil moisture is non-existent, but an abundance of snow sitting on shallow frost should allow for some moisture replenishment. 

Sessler

— Bradley Sessler, North Dakota

The recent interest rate increases coupled with inflation have created new challenges for our ag borrowers. We are seeing an average 20 to 25 percent more need for operating capital as cost of inputs have increased. We have been able to produce solid, positive projected cash flows, but we need commodities to rise in order to counteract the increased cost of doing business.     

— Clay Redding, Montana

At this point our clients are cash-flowing at the higher interest rates, so we have not changed our underwriting.

Our ag clients, however, are more nervous about future interest cost and cash flow. We are seeing less interest in trading equipment and more interest in repairing or upgrading.

— Douglas Smith, Illinois

Smith

The rate hikes by the FOMC have certainly changed the breakevens on crop and livestock production. For example, a typical cattle feeder is now seeing interest costs of $70 or more per head compared to $35 per head a year ago. Margin opportunities still exist in the industry, but producers will have to be mindful of the higher costs of production and factor that into their marketing and risk management strategies.

— David White, Kansas

The breakevens have certainly gone up. Fortunately, current market prices that are available, I would say the majority of our producers are still at or above breakeven prices, considering that you’d have a normal production year. Obviously, those margins are getting thinner.

— Scott Zimbelman, Nebraska

Have supply chain constraints eased? If not, how are they continuing to affect the ag industry in your area? What’s the market like for used farm equipment?

When new equipment is hard to find and cost prohibitive, the used equipment market flourishes. That is the case right now. Used equipment has very high demand and in turn is demanding a premium.  

— Bradley Sessler, North Dakota

Borrowers have encountered numerous situations where parts and supplies have been difficult to find. In some isolated cases, there aren’t many alternatives and borrowers have had to adapt in order to make things work. In general, supply chain issues have eased and customers are able to get what they need in a relatively timely manner.  

Used farm equipment sales and values have been very strong in our area. A lot of our customers see disadvantages to newer equipment. Older equipment is more familiar, easier to work on, no diesel exhaust fluid requirements, etc. Those operators who don’t borrow a lot of money, if any, are the ones we see that buy new equipment in this environment, and they typically have some sort of outside income to help supplement the operation.

— Clay Redding, Montana

Redding

We are still hearing of longer wait times from our clients for parts orders. Most of our clients are ordering parts in advance to avoid delayed shipping. Supplies of used equipment are tight with extremely high price tags for modern used equipment in good or better condition.

Mostly what I have seen on new purchases is the client who has a one- or two-year-old piece of machinery will trade for new with a small cash difference. Dealers have been very aggressive in working with this type of client.

— Douglas Smith, Illinois

Supply chains continue to be a mixed bag. For some products, like urea fertilizer, the supply situation has improved compared to a year ago. That is being reflected in lower fertilizer costs. But other inputs remain constrained and at higher prices, particularly feedstuffs for livestock production, as drought has significantly depleted hay supplies.

Used farm equipment values appear stable, and perhaps down marginally from their peak when new equipment supplies were hard to come by during the pandemic. Farmers that have strong working capital and don’t have to rely on significant debt financing for new equipment are best positioned to continue upgrading their equipment line with the latest models and technology.

— David White, Kansas

White

I think it has, from what I’ve seen. I’m not hearing as many issues with being able to find parts. … I don’t feel it is as restrictive as maybe a year ago when guys were really struggling to just get parts here or there, having to search all over the country to find something.

I still think [the used equipment market is] fairly strong, still enough working capital out there. Farmers are sitting on plenty of cash. They don’t have to worry about borrowing the money. …The equipment market’s still strong and there are people across the board still updating equipment. If we have a tough year this year, that probably slows down considerably.

— Eric Ide, Nebraska

What have the growing conditions been like so far this year? Has livestock been affected by weather conditions?

Here in eastern North Dakota, we are likely a month, or more, from seeing any movement in the fields. Since November 2022, Fargo has seen around 55 inches of snow, with more accumulations in northern and western parts of the state. Forty-degree temps have not been seen since November 2022 and the forecast does not show temps that would promote a quick thaw. 

The abundance and frequency of snowfall this winter has made calving season very difficult. Larger snowfall amounts with high winds required additional attention to ensure the safety and wellness of dropped calves.

— Bradley Sessler, North Dakota

As we move into spring, we are still relatively cold. It’s fair to say that we have had decent moisture. However, no planting has occurred to date. The winter has been a long one for livestock producers. A lot of our producers started feeding one to 1.5 months earlier than normal. Those same producers have not seen any relief as we move into spring. They still have a fair amount of snow and their cattle are on full feed. 

Feed has become scarce locally, and it is being brought in from a long way away.  Our livestock producers that do not have a consistent, solid hay base and purchase a lot of their feed are becoming more leveraged as we have come through three solid years of drought and limited hay quantities locally. 

— Clay Redding, Montana

Drought has been a significant factor in Kansas, particularly the further west you go. Hay supplies are at very low levels, and the lack of local corn production is resulting in historically high cash basis for corn in southwest Kansas as feedlots compete to ensure adequate corn supplies for their feedmills.

— David White, Kansas

We’ve had more moisture this winter than we have in past winters, so we’re probably heading into the spring with a little more moisture than what we have had. However, that’s snow. Some of that runs off, but we’re definitely going to need spring rains to make up for the dry year that we finished with last year.

The snow this winter is good. It helps us get off to a little better start, but we’re far from out of what I would call drought conditions in our area. 

Has livestock been affected by weather conditions? … It was a tough winter out here, quite frankly. We had snow early in the winter, and when it started, it just kept snowing. … We will definitely need moisture as we go through the spring and summer so that they can replenish their feedstocks and have plenty of grass for the cattle to graze.

— Scott Zimbelman, Nebraska

Zimbleman

What are land values like in your area? 

Land prices in eastern North Dakota continue to set record levels. As producers have seen liquidity increase, have found new equipment difficult to find and have seen used equipment prices skyrocket, they have found land a better place to put their resources to work. Here in Cass County, competition from investors with 1031 money is also driving land costs up and making it very difficult for farmers to compete for quality land.   

— Bradley Sessler, North Dakota

In our area, land sales have slowed to a crawl. The rising rates have really dampened any producer growth. Sales in general are steady-to-higher, with almost all of the sales being cash sales from outside buyers. Availability of properties has also decreased.   

— Clay Redding, Montana

Land values remain strong with no evidence of falling at this point. The low supply of tillable land for sale seems to be the biggest factor for price strength.

— Douglas Smith, Illinois

Land prices continue to climb, albeit at slightly slower rates of growth compared to the explosive growth immediately following the various pandemic stimulus programs.

— David White, Kansas

They haven’t fallen off at all. We have been hitting, as far as I can recall, all-time highs in our markets, in our direct area. … Even with the increase in interest rates, there’s enough cash in the market where guys are still buying ground. … We may be at a point where we’re seeing the top. 

We’ve got some outside pressure, too, what the general economy does. They may fall back a little bit, but are very strong right now. 

Ide

— Eric Ide, Nebraska

What do bankers think should be added to the next farm bill?

Producers in the Dakotas can experience difficult weather conditions. Ensuring crop insurance programs continue to be funded is crucial to the stability of our ag economy. Also important is the development of our rural areas in the form of utility services such as broadband, hospitals, support for our schools and conservation programs.   

— Bradley Sessler, North Dakota

The Farm Bill is essential to the agriculture industries in this country. … All of the programs are necessary. I do feel that whatever they do, it should be created with simplicity, ease and focus on risk management. These programs should be designed to be user-friendly which in turn helps local FSA offices, as well as producers. I think a goal of quick turnaround should be at the forefront of designing the Farm Bill. Long turnaround times on program payments can create difficulties for producers and their financers.   

— Clay Redding, Montana

The USDA guaranteed lending program is in need of updating for the current environment. The guaranteed loan limits are not adequate to support the farmers’ borrowing needs given today’s land prices and higher cost of production. 

— David White, Kansas

We like the crop insurance program that’s out there. That’s certainly something that farmers utilize and provides a nice safety net there for those guys. Probably if anybody gets left out occasionally, it would be our cow/calf/yearling guys. It’s a little more challenging to set something up for them that works. 

— Scott Zimbelman, Nebraska

Are there any other trends you’re noticing in 2023? What about longer-term issues, such as finding the next generation of farmers/ranchers and ag lenders to work with them?

In our area, I would expect for the ag industry to continue seeing consolidations as margins continue to tighten in general.  Producers have to grow in order to capture economies of scale, although growth is restricted by good, quality labor. Technology will become a bigger player in allowing producers to grow.  

As a lot of our producers are aging and retiring, not all of them have continuity plans. We are fortunate in our area that we have a fair amount of up-and-coming producers. However, they are heavily outweighed by projected retirements in the near future. It is very difficult for young producers to tap into this business without some sort of favorable transition from either family or longtime friends who want the next generation to operate it and succeed. It requires significant investment and capital, not to mention it takes special individuals to want to take on this industry in these times.  

— Clay Redding, Montana

I think the outside pressure on land values is certainly a challenge for the producers to come in and purchase that ground and make it make sense to use it for agricultural purposes. If you want to buy grass out in Western Nebraska there’s no way it makes any sense to do that just from a production standpoint. Somewhere in your operation, you’re going to have to subsidize that purchase. And I think that would be fair to say for farm ground as well.

— Scott Zimbelman, Nebraska