Banker: Lower commodity prices a concern
February 24, 2014
SCOTTSDALE, Ariz. — Lower commodity prices are a concern for bankers even though farmers do not have the kind of debt load they had in the 1980s, Michael Swanson, a vice president and economist with Wells Fargo said here last week.
The banking industry learned its lessons from the farm crisis of the 1980s, and the regulatory framework includes policies that will not allow farmers to get into the same kind of trouble by buying land on credit, Swanson told the Crop Insurance and Reinsurance Bureau annual meeting here, which was held February 5 to 7, just before the crop insurance industry convention.
"The last five to seven years have been a wonderful environment for farming," Swanson said. "The question is 'What have you been doing in that environment?'"
With a stricter regulatory framework than in the 1980s, farmers couldn't get debt financing and have been using cash to pay for land, but as prices go down that raises questions about their cash flow situation, Swanson said.
"They could not get debt financing so they took working capital and put it into a fixed asset. As they go from $6.50 to $4.50 corn, the cash flow will look a lot more restrictive. When they go to financial institutions people will find out cash isn't trash."
Agriculture Department statistics look at overall debt to asset ratios and do not see trouble, he said, but within those statistics expanding operations have been accumulating a lot more debt than older operations.
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Swanson, who is based in Minneapolis and previously worked for Land O'Lakes, also noted that the problem could get worse as time goes on. He noted that farmers may get "cash infusions" through crop insurance payments in 2014 going back to 2013 that they will not get in 2015.
The farmers' obligations are not all business-related, he said, noting that there have been "a lot of lifestyle adjustments" during the years of high commodity prices, including the purchase of condominiums in Arizona, which are known in the banking business as "killer toys."
But he added that farmers "in the top percentiles" are better at business than farmers in the 1980s, with new technology, higher yields and better management skills.
One of his hardest jobs, Swanson said, is to convince farmers that they need to pay attention to what goes on in the rest of the world.
"Clearly we are a highly synchronized global economy," he said, noting that among investors there has been "a panic developing over developing country exchange rates."
The increased income in farm country in recent years has been due to biofuels and China's demand for food, he said.
And relying on his experience at Land O'Lakes, Swanson said that doing doing business with China is like doing business with Wal-Mart. Winning more business from the giant discount retailer was great, he said, but an executive could also get a phone call and lose it. "Then what do you do at the factory level?," he asked.
The "threats" that farmers and business executives need to watch, Swanson said, are not from Brazil and Argentina, which are already "known quantities" in agriculture production, but the "marginal competitors" who may change markets in the future.
Swanson challenged both farmers and crop insurance executives to move beyond spread sheets when making decisions.
"Spread sheets are the worst way to look at the world," Swanson said. "They do not push back or question your assumptions." F
–the Hagstrom Report