Managing the Cycle

CHICAGO (DTN) -- The market outlook for the next two to three years for corn, soybean and wheat farmers will remain full of red ink, forcing farmers to continue squeezing out every cent of efficiency or potentially exploring other cropping options.

A pair of top loan officers from AgStar Financial Services and Rabo AgriFinance teamed up to offer some insights for farmers at the DTN/The Progressive Farmer Ag Summit in Chicago. The loan officers, like most commodity analysts, don't see any strong price rally coming over the next year due to the current stocks-to-use ration for crops such as corn and wheat. Instead, farmers need to move into 2017 and beyond understanding they are likely in a prolonged cycle of lower prices.

"This is what happens with ag commodities is we go through cycles," said Mark Greenwood, senior vice president of financial services for AgStar. "For the producers out here, you need to change your thought process to manage the cycle."

The lenders also pointed to some expectation of increased volatility in the next few years. That would create some opportunities for producers willing to take advantage of market volatility. Over the next two or three years, the lenders see increased land sales but also lower values for those sales. Land values could come down 10% to 12% over that time. Income wise, most farmers will continue to see lower income, particularly in 2017. By 2018, farmers could see 50% of farmers making break-even income but not necessarily being profitable.

Curt Hudnutt, executive vice president and chief commercial officer for Rabo Agrifinance, noted that farmers need roughly 3 million to 6 million acres to come out of production in some way. He pointed to the prospect of changes in a potential new farm bill next year that could expand the Conservation Reserve Program. "It is an area we feel really needs some attention in the new farm bill," Hudnutt said.

But lawmakers cut the CRP in the 2014 farm bill, partially as a cost-saving move and partially responding to calls to boost production. Further, even if Congress acted, it would likely be at least 2018 before the current 24-million-acre CRP could increase.

The lenders also want to see a more consistent safety net for corn and soybean producers, citing the declining benefits farmers are seeing under the Agricultural Risk Coverage program. The way the ARC formula works, payments were front-loaded in the 2014 farm bill, but that also translates into a lower potential for payments over the next two years.

Greenwood stressed that producers not only need to know their current financial position, but so do the lenders. It's not a good sign for a farmer needing financing if the bank doesn't have a good understanding of a producer's cost of living.

"If we have to come ask you for your financial records, that's not a good place to be in all honesty," Greenwood said. "It will help you with rates and terms if you have your numbers in line to make yourself better moving forward."

Along those same lines, producers need to know their cost of production, not just per crop, but also evaluating costs per parcel. Farmers need to be willing to walk away from an unprofitable or marginal field. If a farmer is willing to walk away from a piece of land, perhaps there also is some excess equipment that could be sold. Then there are those non-core assets -- the boat, the lake house, etc. -- that farmers bought in the good times that likely need to be put up for sale as well.

"Liquidate those non-core assets," Hudnutt said. "They are not beneficial to the business and they drain your cash flow."

Some trends that lenders are seeing for farmers to change up their operation include: Group buying inputs, focus on basis management and diversification of crops. Then there is the prospect of finding niche markets such as working with emerging food companies and filling their ingredient needs.

"You are going to see more niche markets over the next five to 10 years than we have ever seen," Greenwood said.

Hudnutt concurred, citing consumer preference. He pointed to a company he knows sourcing its edible beans from France for its brand because the company has a hard time finding those beans in the U.S.

Hudnutt said producers need to get beyond issues such as the biotechnology/non-GMO debate.

"Forget about what you and I believe in," Hudnutt said after his presentation. "We are not the consumers driving the demand out there."

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

(ES/AG)

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