Finding Your Financial Footing in 2016 York Ag Expo York, NE January 13, 2016 Brent Gloy, LLC www.ageconomists.com bgloy@ageconomists.com Twitter: @BrentGloy
Agenda The situation The outlook in 12 questions The long term trends Strategies for maintaining your financial footing Download the presentation and other materials from a private website developed just for you: http://ageconomists.com/york
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Some Key Questions Heading into 2016 1. Will profitability fall for a third year? 2. Will costs adjust to alleviate margin pressure? 3. Will farmland prices continue to SLOWLY soften? 4. Will strong financial conditions hold? 5. How many acres of corn and soybeans? 6. El Nino, La Nina, or what? 7. What will happen with interest rates? 8. What about the dollar? 9. What about China and global uncertainty?
But the #1 Question I get is Is this going to end like the 1980 s? There are similarities There are important differences Still, the need to secure your financial footing is real Let s take a quick look
Farm Income Declines Sharply
Commodity Prices Spike and Fall Dramatically but Nothing like the 70 s and 80 s
Real (2009 USD) U.S. Farm Sector Debt, 1960-2015f Real debt levels have increased Still below peak of the 1980s Where to from here?
Exports are Critical to Ag but Different than 80 s
Dollar is Appreciating, but Less than 80 s
Inflation Remains Low Inflation remains below Fed s 2% target Tremendous decline in energy and commodity prices
Where to with World Economic Growth? SOURCE: IMF 2015 World Economic Outlook
China s Influence Two Examples
While there are similarities, today is not the 1980 s Factor 1970s and 1980s Today Farm income Big shock then big bust Big shock then big decline Commodity Tremendous short term shock then bust Big shock then decline prices Debt Huge increase in leverage Increase but not as dramatic Farmland values Huge increase then bust Huge increase and moderation to date Exports Huge increase then bust Large increase Exchange rate Dramatic appreciation in dollar in the General strengthening bust phase Inflation Very high inflation rates Very modest inflation Interest rates Negative real rates then extremely high real rates Relatively low real rates persist
Today s Agriculture Margin Compression Continues Little relief on variable costs Will be difficult to avoid until fixed costs adjust Rents Equipment Family living Land values Mitigating factors Crop insurance Crop mix Government program Bottom Line: Farmers Better Have Reserves and be Prepared for Tighter Finances than Many Have Dealt with for Years
2016 Looks Only Marginally Better Than 2015 Let s take a look at corn and soy budgets by regions shown in map
AEI 2016 Budget Estimates for Corn
Corn or Soybeans in 2016? Long-run average is 2.3 Earlier was favorable to corn now switching back toward balance
What Will Change the Situation?
Fertilizer Prices Remain High, but Beginning to Fall Have been through their own boom period Crop demand keeps these and other prices high Will likely soften if acreage mix changes Will likely change as supply/demand fundamentals change
Machinery Costs and Investment Machinery investment varies drastically This is one of the fixed costs that needs to adjust if prices remain low Source: Langemeier and Ibendahl, Crop Machinery Benchmarks. Journal of the American Society of Farm Managers and Rural Appraisers, 2014.
Farmland Prices Coming Under Pressure Farm incomes have fallen and market is reacting This is likely to continue as market adjusts to new situation Watch closely if interest rates start to climb Image Source: Kauffman and Cowley, Loan Volumes Continue Rising as Lower Farm Incomes Persist, https://goo.gl/v1xdjm
Immediate and Substantial Relief from Rent Reduction is Unlikely www.ageconomists.com http://wp.me/p4aea3-1q
Monetary Policy Environment is Evolving Source: Federal Reserve Board of Governors http://goo.gl/zyxafy
Farm Interest Rates Remain Low
Long-Term Rates Remain Low How would people react to rising interest rates? Could have big impact on farmland values
Farmland Prices Likely to Remain Under Pressure
Farmland Values Likely to Remain Under Pressure Land values under the assumption of 200 bushel per acre corn, and 3.5% capitalization rate, current IN High Quality farmland = $9,266/acre http://goo.gl/wfl2u5
Farm Interest Expense on the Rise
Government Payments Will Not be as Large as in Previous Downturns
Perspective on the Situation
Building Your Strategy for the Shifting Environment
Producer Strategies for Success in Today s Environment 1. Stay laser focused on costs 2. Manage working capital 3. Pay attention to debt repayment capacity 4. Pursue good deals with discipline 5. Scout and crunch numbers 6. Manage lending relationships 7. Don t forget about price risk 8. Think beyond crop insurance when managing risk 9. Consider alternatives
Final Thought for Navigating Today and Tomorrow s Ag Environment Focus on management and strategic plan Deploy resources today for tomorrow s reality versus defending yesterday s decisions Peter Drucker Focus on Building Strategies to Take Advantage of the Key Trends and Maintaining Flexibility to Guard Against the Big Risks