Views and Perspectives from the Road

Views and Perspectives from the Road

This article is being written after assisting one of our registered Holsteins in the birth of what hopefully will become the 12th generation of excellent cows. It is nice to know I still have it from a producer's standpoint! The past three months on the road have been very interesting as I have engaged with lenders, producers, and agribusiness professionals in seminars and speeches. The following are some of my views and thoughts from the road as the fall season starts in full swing.

Seminar attendance has varied. Attendance by producer groups is up by as much as 25 percent. However, lender attendance at face-to-face sessions has been down by 25 percent. Producer mindset about the future can be summed up in one word: anxious. Accelerated transition of farm and ranch businesses is now being observed due to the potential adverse tax law changes. In the “I” states of Indiana, Illinois, and Iowa, many farms are being broken up by the next generation that wants to cash out rather than pay homage to their family heritage. In these cases, the small tracts of land are often sold to larger producers, investors, or investor groups. A number of coastal doctors, dentists, and other white-collar professionals are becoming the new owners.

For lenders reading this article, be careful of analyzing 2020 and 2021 financial results using only a Schedule F tax form. More producers are purposely lowering their net farm income through prepays, accelerated depreciation schedules, and adjustments in revenue and expenses to qualify for stimulus funds, medical benefits, and children benefits. Accrual analysis is definitely needed and keep a sharp eye on the revenues and expenses that may be non-recurring. When analyzing government payments, which may represent over 50 percent of net farm income, one must determine whether they are reoccurring, such as conservation payments or other multi-year payments.

On a very positive note, engagement with numerous multi-day young and beginning farmer and rancher events has been very uplifting. Across the country, many young farmers are involved in multiple business entities. These multitaskers are aligning their talents to generate a diverse set of revenue sources, some within the agriculture industry and some outside. Examples of jobs include welder, crop and livestock consultant, marketing specialist, lender, and trucker; if there is a way to generate income, they will find it! Young producers often lack collateral and equity, but they make up for it in cash flow and profitability of various enterprises and a high business IQ. This group is now being targeted by nontraditional lenders as a result of slipping through the cracks of traditional lender models and underwriting standards. Many experts indicate that this group desires relationships through technology. However, the educational venues this summer proved that face-to-face interaction is still valued, whether it was with the lenders or their peers.

Three producers who spent multiple days at the Advanced Agricultural Lending School in Kansas had some keen insight. One producer in his early 40s indicated to the group of bankers that he recently lost $500,000 of potential profits by following a marketing October 2021 First Dakota National Bank 2 and risk management plan. However, he was quick to note that following a plan over the past 12 years has yielded solid profits 90 percent of the time. This track record has enabled him to acquire land all but one year that he has been farming by himself.

Another producer and his family flipped their production techniques, which has yielded more profit, simplified the business model, and has become more environmentally sustainable. Instead of harvesting 10,000 round bales annually to feed the herd, a fiveyear shift of production management and grazing has allowed them to survive drought and those pesky blizzards that occasionally hit the ranch. They reduced much of their fixed costs in machinery and equipment and decreased their supply chain issues caused by not getting parts on a timely basis. They have increased their bottom-line profits and are now embarking on value-added markets. Both individuals utilize their cash flows and monitor the results monthly to tweak their business model throughout the year.

All producers are very concerned about inflated costs such as fertilizer, fuel, and rent. As one young producer stated, instead of margins being in the dollars, they are more likely to be measured in quarters, dimes, and nickels over the next couple of years.

From a global standpoint, watch the geopolitical changes occurring in China. Their leader, President Xi, is shifting from an economy that is authoritarian capitalism to more socialism as he seeks his unprecedented third term. China will be decoupling from Western markets such as North America and Europe. Simultaneously, they will become more closely engaged with Eastern Europe and South America, benefiting from their investments made in the Belt and Road Initiative beginning in 2013. China has applied for entrance in the Trans-Pacific Partnership (TPP) to counter U.S. initiatives. This could be very impactful to agriculture trade, which represents one in five dollars of net farm income in the U.S. and for some commodities it is much more. On a positive note, some of the existing TPP members may not accept China’s bid.

In my circles, more discussion is coming concerning environmental, social, and governance (ESG) practices. This is a new measure of success for many corporations and businesses. Globally, investors and consumers are holding corporate businesses accountable which brings a degree of transparency of where and how production is sourced. This element will most likely accelerate toward the year 2025.

This article was written from the barn office as Pedra, the mama Holstein, is enjoying her newborn yet to be named!