On the Road Again

On the Road Again

Similar to the Willie Nelson song “On the Road Again,” face-to-face conferences and banking schools have started again like a water hose under intense pressure with some interesting twists and turns. Airports are crowded with infrequent flyers who have pentup stimulus savings and energy. This, combined with consumers wanting to experience everything at once, creates a climate for exponential tension. Good luck getting a meal in an airport or hotel with signs indicating labor shortages displayed in many store windows. Rental car lots are empty and if you are lucky enough to find a vehicle, you will likely encounter inflationary prices.

Despite the aforementioned challenges, the producer, lender, and agribusiness groups have been very attentive and engaging. I am observing extended engagements during breaks and meals as people are craving face-to-face interaction. Let’s discuss some of the hot topics and perspectives I have encountered on the road that will be impacting businesses and economic decisions in the future.

Inflation

Inflation is at the top of mind for farmers, ranchers, bankers, and even consumers. Will inflation be temporary or permanent and what are some of the factors affecting the outcome? As one producer panelist at a banking school clearly stated, 2020 and early 2021 have been banner years economically. Profit margins are high as a result of lower input costs pre-inflation and a rapid rise in commodity prices. Couple this with stimulus payments and profits are as high as the commodity super cycle from 2007 to 2012. However, this producer was also quick to point out that late 2021 and early 2022 will be different. Input costs have escalated as much as 20 to 30 percent and commodity prices are uncertain. He stated that he will need to constantly monitor his marketing and risk management program with an inflated, volatile cost of production in order to garner a positive margin.

On the other hand, a livestock panelist indicated that he and his wife did not benefit from the higher prices. Increased input costs, such as feed and fertilizer, have made a scenario for tight margins. These producers are monitoring cash flows monthly and seeking any strategies to improve operating efficiencies. They were quick to point out that both the business and household stimulus checks provided a positive boost to the financial ledger. This has been the case for many in agriculture as data indicates that government payments as a percent of net farm income was 61 percent for 2020. This is nearly double the amount from 2016 to 2019.

What to do with profits?

My favorite question from the road this summer has been from producers, “I am profitable, but what should I do with the positive bottom line?” First, an analysis of how the windfall profits were generated needs to be conducted.

Were the profits generated as a result of a well-written marketing and risk management program that was executed and monitored? On the other hand, were the profits a result of government stimulus checks and what level were they as a percent of net farm income? Is the profit picture due to operational efficiency and what is the probability that it will sustain in the future with the aforementioned inflating costs? Were profits the outcome of speculation on commodity prices and “shoot from the hip” marketing? While this action may be profitable in the short run, following a marketing plan is often more sustainable from a long-term bottom-line standpoint.

After this analysis, determine how profits were distributed. High on the priority list should be building working capital as a blocking strategy or as dry powder to take advantage of opportunities. Were the profits used to pay down debt or to shore up operating lines of credit? Were investments made to increase operational efficiency and to incrementally grow the business? How much of the positive bottom line was channeled to family living expenses? One casual observation from the road is that family living costs have crept up again. Analysis of the Nebraska Farm Business, Inc. data finds annual family living expenses at nearly $100,000 in 2020, which is similar to the profitable years of the great commodity super cycle.

Tax increases

The possibility of changes in the tax laws that would increase both income and estate taxes is resulting in some interesting trends. In some areas of the country, farmers and ranchers are selling assets before tax increases occur. Stepped-up basis and capital gains rules that may be changing and the possibility of reducing the amount exempted from taxes has resulted in an emphasis on deferred tax liabilities. This is the amount that will be owed if partial or total liquidation of assets was to occur.

Speaking of assets, premium prices are being paid for high-quality, older farm equipment without all the latest technology. Costly repairs due to technology glitches and supply chain issues that are affecting the ability to receive parts in a timely fashion have resulted in inflated costs.

Investments

Farmland investments are still very strong in many areas of the country. The price of premium farmland with water availability is up 10 to 20 percent. The breakup of family farms is accelerating in the “I” states of Illinois, Indiana, and Iowa. The next generation of family members are cashing out, resulting in many smaller parcels of land on the market. The family members that remain are finding it difficult to operate economically viable operations as a result of high land costs, both to purchase and rent. In addition, the psychology of high commodity prices from the perspective of siblings removed from the business creates a fantasy of expected income not grounded in long-term agricultural economic cycles.

Crypto-mania

“Hey...You wanna see something really scary?” This quote from the old movie Twilight Zone is very applicable to the latest trend uncovered on the road. At the Graduate School of Banking at Colorado, one banker indicated that two of his farm customers increased their operating lines of credit, using land as collateral, to purchase cryptocurrency. Another indicated that some of their customers' stimulus checks were immediately invested in cryptocurrencies. Another banker’s sisters invested their stimulus checks and some of their household income into the crypto world. To top it off, one-fourth of the bankers at the school have invested in cryptocurrencies. Returns vary with one-third of the bankers posting returns above 20 percent to some losing nearly 20 percent. A hush went over the students and faculty when we presented these results at our panel discussion in the evening. If it grows too fast, it is a weed. This old saying may very well be applicable in this situation, but only time will tell.

On a side note, my technology teaching assistant at the banking school had a friend who made $37,000 in the month of May by playing the crypto market! As you can see, the road views have had some interesting twists and turns. In the long run, monitoring cash flows monthly or quarterly, planning for business life after government payments, staying abreast of tax law changes affecting transition management, and prudent investment strategies will be the focus of the future.