Risk & Rewards A Roadmap for Your Farm in By: Mark Jensen SVP & Chief Risk Officer Farm Credit Services of America & Frontier Farm Credit

Transcription

1 Risk & Rewards A Roadmap for Your Farm in 2017 By: Mark Jensen SVP & Chief Risk Officer Farm Credit Services of America & Frontier Farm Credit

2 Service Area Overview Serve all of Iowa, Nebraska, South Dakota, Wyoming, and the eastern portion (41 counties) of Kansas More than 57,000 customers Own/service nearly $28 billion in loans 48 retail offices Approximately 1,600 employees 2

3 January 2015 Looking Back Record Net Farm Income Extraordinary margins per acre Strong cash positions Producers upgraded entire equipment lines Now over-equipped Working to defer income tax Prepaids, equipment purchases, Chased land values upward 3

4 Price of Corn Corn price $3.50 to $4.50 4

5 Interest Rate Trends Watch out for interest rates! 5

6 Energy Independence

7 Real Estate Values Ag (cropground) prices 20 30%

8 Who saw that one coming?!

9 January Conclusions Record corn crop Significant carry-over Price adjustments Fed tapering Input prices now have increased Strong balance sheets Tremendous uncertainty 9

10 Looking Forward

11 Grain Production Agriculture The revenue side of grain production agriculture adjusts in real time with markets and bushels The cost side adjusts in a lagging manner The issue becomes: - Time frame of the lag - The magnitude of the lag 11

12 Corn Price Forecast 12

13 Future Realities Grain production agriculture needs to reconcile the reality of our current revenue stream. Price will not fix the problem. Cost reductions are needed. 13

14 Forward Planning Assumptions Global & US economy Interest rates Exports Farm Bill & Crop Insurance Ethanol Corn price - Input costs - Cash Rent

15 It s all about: Strategic Thinking Planning.Positioning 15

16 A Strategic Approach Three Steps: 1. Efficiency, Efficiency, Efficiency - You must be a low cost producer 2. Working Capital - The first shock absorber 3. Marketing and Risk Management - Crop Insurance - Marketing plan - Interest rate management 16

17 Typical Example STATUS QUO 1,500 owned acres; 500 rented Solvent Operation: Net Worth $4.5 million PROPOSED SOLUTION 1. Restructure real-estate loans ($500,000 + additional $200,000 into new 30-year loan) Not Profitable: 2016 Net farm income: -$70,000 Problem: Liquidity Working capital $0 Last December chose not to address debt structure 2. Sell Grain inventory of $200, Enhance financial management tools/practices underlying cost structure (fixed and variable) 4. Monitor & reduce family living costs Source: Farm Credit Services of America, November 2016

18 Focus on the Big Items Source: Purdue University estimated 2016 corn production costs 18

19 Tangible Producer Actions Know your land cost / acre Know your equipment investment per acre Fix long term interest rates Resist aggressively prepaying fixed rate loans Crop insurance coverage - Revenue protection - Trend adjusted yield Flex leases

20 Financial Management Strategies Not an environment to be highly leveraged in - thoughtfully manage how you structure your debt Migrate towards an accounting system capable of tracking accrual earnings Fix long term rates - It may not be too late Build/Maintain working capital - consider the cycle you re in, the needs of your business for the next 20 years - There is a ST cost to holding liquidity, but will the LT gain more than off-set that? 20

21 The Ultimate Question How do you position your operation/business to withstand the challenges facing us today, yet take advantages of the opportunities that exist long term? 21

22 Thinking Beyond The Moment Key to Managing Cycles: Balance dealing with the current situation with thinking, planning and deploying resources today for tomorrow s reality and opportunities 22

23 World Population Today = 6 billion 2050 = 8 billion 23

24 United Nations Projections Global food production will need to increase 40% by 2030 and 70% by 2050; beef and dairy production will need to DOUBLE by 2050 Farming in 2050 will occupy only 13% more land than is used in 2008

25 25

26 26

27 North America A Strategic Advantage 27

28 1980 s vs. Today Summary This is NOT the 1980 s. This IS a period of adjustment Important to not forget the long term view Agriculture will adjust Grain production agriculture is not going away in the upper Midwest 28

29 Reasons To Be Optimistic Long-term world demand Rise of the middle class Demographic position Innovation Transportation infrastructure Agriculture s overall balance sheet position No country can produce more ag product, at a higher quality, more efficiently and can deliver 29

30 Final Thought The stability of unmatched by any other industry Investments that support / enhance agriculture will pay off for decades to come 30

31 Questions