Farmers concerned shifts in global agreements could slow export opportunties
Any projections about the coming agricultural season must be couched with the same reservation most industries need in 2017: It depends on the new presidential administration. No discussion of the farming and ranching industry is complete without acknowledgement of this reality.
“What’s going to happen with trade and the overall uncertainty?” asked John Blanchfield, who oversaw agricultural banking policy for the American Bankers Association for more than 25 years. “Those are the unknowns.”
Well, someone must know, right?
“Nobody knows,” said Mike Boehlje, professor of agricultural economics at Purdue University, West Lafayette, Ind. “If somebody tells you they do know, don’t believe them because it is very unclear what is going to happen. We don’t know where this discussion is going to go.”
An agricultural lender, though, would need to know what to expect in order to proceed with springtime business. Certainly, the president of the agri-business division at a $1.4 billion bank has some foresight.
“I wish there was certainty there,” said Nate Franzen of First Dakota National Bank in Yankton, S.D. “I would say the biggest thing is that uncertainty, much like a lot of the Trump administration. It’s a different administration. They don’t have a political history for us to base things on. Six months from now, we’ll all have a much better feel of what this administration is really going to be driving.”
In the midst of agricultural loan renewal season, Franzen has chosen to maintain a calm, borderline optimistic demeanor regarding President Donald Trump and any forthcoming actions. Nonetheless, that nine-letter, three-syllable c-word, and variations thereof, is never far from Franzen’s lips.
“Obviously in business, we prefer certainty,” he said. “If we have certainty, we have a stronger comfort level of being able to predict the future. We can make better business decisions. That’s always preferred.
“With that said, I’m certainly not in panic mode with this administration yet,” Franzen continued. “A lot of what they talk about has the potential to be very positive for industry and for ag. The jury is out. There are some things to be concerned about but six months from now, we all might be pretty tickled with some of the things they do.”
The most striking concern comes from Trump’s public stance on trade. Boehlje estimated a quarter of U.S. farm income depends on exports. That estimate is a touch higher than the U.S. Department of Agriculture’s, which comes in around 20 percent. Franzen points to about half of U.S. soy beans, rice and wheat being sold across borders. This does not even mention the quarter of fresh fruits and processed vegetables, per the USDA. Blanchfield worries about dairy, 30 percent of which is typically exported. No matter the exact percentages, any action threatening the more than $130 billion industry of agricultural exports will only further the downward trend in the ag industry since the super-cycle years of 2006-2012.
“For agriculture, trade has been one of the big drivers of the prosperity that farm country has enjoyed for most of the years of this century,” Blanchfield said. “Ag was a big net-net winner with NAFTA. Ag has been a big winner in trade with China. When you listen to a lot of the rhetoric the administration is talking about, they have not been talking about how much winning we’ve done on trade. The talk has been on how much losing we’ve done on trade.
“I would say ag may be the No. 1 beneficiary of free trade, of NAFTA, of China, would have been a big winner in the [Trans-Pacific Partnership trade deal], etc. Trade has expanded agriculture, as opposed to manufacturing,” Blanchfield said.
One way or another, Trump’s trade declarations have altered perceptions of future trade with Canada, China and Mexico, the three largest importers of U.S. agricultural products. By removing the United States from TPP, Trump likely strengthened China’s overall trade footing. Thus, China will be in a stronger position should any tension arise concerning its exports to the United States. The Chinese could retaliate or focus on mere bargaining ploys with the United States, which depends on agricultural exports to China.
By threatening the North American Free Trade Agreement, Trump incentivized both Canada and Mexico to begin pondering alternative sources. Boehlje said the neighbor to the south has already begun pursuing corn alternatives from South America. This could, theoretically, spark a domino effect, one that may confirm some of Franzen’s cautiously positive outlook.
“If Mexico decides to get their corn, for example, from other parts of the world — South America specifically — then the people in South America who were exporting corn to other countries are not going to be able to do that,” Boehlje said. “That means there will be some of those markets that we might be able to ship our corn to.
“One can’t necessarily say that exports will decline by the total amount because we might be able to replace our Mexican markets with markets elsewhere. Transportation costs will probably be higher … so this won’t be good for farm prices,” Boehlje said. “It just may not be as devastating as some people might suggest.”
Global concerns, local solutions
“Just not as devastating” is not a phrase farmers, ranchers or bankers want to hear applied to the agriculture industry. Combining these trade worries with the strong dollar and low commodity prices leaves a lot to warrant concern. The best way to combat big picture worries is with local, personal solutions, according to Michelle Klocke of Peoples Bank in Hawarden, Iowa.
“In the current challenging times, the tools I use with customers revolve mostly around expense control, marketing, risk management and increasing sources of off-farm income in certain cases,” Klocke said. “Specifically, we look at cost of living and ways to be efficient with those dollars, possibly approaching landlords to renegotiate cash rents.”
While some expenses can be relatively easily trimmed, some costs are unmovable. Fertilizer, seed, chemicals, livestock and feed are all costs innate to the industry. Rather than continually butt against those price tags, Klocke and Franzen both advocated for other streams of income, such as the aforementioned off-farm income. When the balance sheet mandates spending more, find ways to make more.
“The two terms we’re using with our borrowers frequently these days are efficiency and utilization,” Franzen said. “Efficiency speaks to cost … Utilization, that speaks to revenue. How do we take the assets we have and improve utilization of those assets to drive more revenue, to improve and increase revenue?”
Of those assets, skillsets applicable away from the farm are increasingly paramount. In 2015, 48 percent of U.S. farms grossed less than $10,000 from farming, according to the USDA. Yet, those households still earned an average of more than the U.S. median of $56,516 due to off-farm income. Even the class of farms ranging from $10,000 to $349,999 in gross farm income averaged off-farm income of more than that median.
That non-farm income, in turn, provides for current loans and secures possible future credits.
“They have income; that means they might not need to borrow quite as much money for some of their operating needs,” Boehlje said. “But it also means they have, at the same time, repayment capacity from that income …
“It may result in a little bit less debt needed by those farms because they have more earnings and retained earnings they can use to finance bringing the crop in. On the other hand, it also may mean they have more ability to safely borrow money if they need money because they aren’t entirely dependent on income from farming to service the loan.”
Oftentimes, those earning the off-farm income are the younger generation. While that added stream of revenue is appreciated and vital amid the current downturn, the efforts elsewhere may lead to conflict down the road.
Consolidation mirrors banking
Although farms continue to produce more commodities than they can sell and the acreage farmed in the United States only increases, the number of individual farms continues to decrease, just as it has for more than 30 years. In Minnesota, for example, about 300 fewer farms reached the end of 2016 than did the end of 2015; meanwhile the average size of individual farms increased by an acre.
This consolidation mirrors community banking: rather than a large bank buying the small banks, it is often two small banks merging to create one slightly-larger bank. Some small farms hope to survive, if not thrive, during the current agricultural climate by acquiring more land.
“Both on the farmers’ side and on the banking side, it’s safe to say we’re going to see additional consolidation,” Blanchfield said. “Slightly larger banks will be able to accommodate larger ag deals.”
Bankers will also be very familiar with the reasoning for some farm consolidation. On a small, family-owned farm, the next generation may not want to continue the business. Perhaps the elder generation does not trust the younger generation to do so successfully. Either way, transition planning is more necessary than ever.
“What we found is that’s a huge area of stress in most farms,” Franzen said. “People don’t like to plan for their ultimate demise. They don’t like to plan for the transition process. It wasn’t happening. We have farmers and ranchers out there who just didn’t have a plan.
“Certainly, that’s going to be a key success driver in how many farms and ranches do we keep out here.”
There, Franzen said a version of that word again, this time without the negative prefix: certainly. At a bank with more than half its business tied to agricultural lending—not to mention the local restaurants with loans relying on farmers to have disposable income to spend on burgers and beer — certainty or uncertainty cannot dictate too much of First Dakota National’s lending approach. No matter the cycle, no matter the president, no matter the trade status, Franzen must help his customers.
“We know what the noise is right now,” he said in reference to the effects of the November election, but he could have been referring to anything agricultural. “What I keep telling people who are hitting the panic button, this is just noise.”
Klocke agrees with Franzen. That discourse is a crucial part to continuing the ag lender-farmer dynamic in a mutually beneficial direction.
“There is not a cookie-cutter fix,” she said. “The key is to know your customer and keep up good communication. That goes all the time, not just strained times.”