This week in Progress: Farming and Ranching
Strong financial relationships crucial to Ag
CUSTER COUNTY - What does the crystal ball hold for the future of Ag in 2021? Some will say Ag producers don’t need to go to Vegas to gamble, their lively hood is a gamble each and every day!
With the historic low interest rates currently, what does this mean for the Ag producers in our communities.
Looking back at the highs and lows of interest and commodity prices over the past several years, you might find some of these numbers interesting. The average mortgage rate in 1981 was 16.63 percent. And that’s just the average; some people paid more. December 19, 1980 the prime interest rate was 21.5 percent so with today’s current prime at 3.25 the 1980 interest rate is close to 6.5 times higher.
“I can remember customers paying that amount. It was plumb crazy,” reflected Bryan Trimble, Branch President of Flatwater Bank in Ansley, Trimble has been in banking now for 41 years.
“Other than prime rates ranging between 3.5 to 8.25 percent from 2001 to present, you would have to go back to August 23, 1960 to find 4.5 percent” Trimble said, pointing out the comparison where the interest rates are currently.
But when you are talking low interest rates it is also important to compare commodity prices as well. This area raises, corn, soy beans, hay, cattle and hogs, just to name a few products but for simplicity, we will use the price per bushel (pb) of corn.
Can you guess what the per bushel price to sell corn was in 1960? Comparing to the same month and year, August 22, 1960 corn was $1.15 pb. The pb as of Jan. 18, 2021 was $5.01 pb.
It is sometimes hard for the person who has worked an hourly wage all their life to understand that Ag producers do the same type of work day in and day out, just like they do, but Ag producers take a gamble each day, each year to produce food for the world and get paid only on what the current commodity price is. Sometimes they make money and sometimes they lose money
You will often hear individuals who have been in banking or farming for some time talk about the farm crisis of the 1980s. You might ask, what caused the crisis?
Most will say the Federal Reserve tightened money policies with the intention to bring down the record high interest rates. That, in turn, caused farmland values to drop 60 percent in some parts of the Midwest. With the record yields reported in the 80s, it resulted in too much product on the market that, in turn, forced prices down
Looking back over the years, some would say both banks and Ag producers learned lessons from that time. Lending of the 70s and 80s was asset-based lending. The borrower’s assets were used as collateral and land was the main collateral. With land values dropping by such a drastic percentage, it changed the dynamics and structure of the family farm when just the year before, the land value was so much higher.
In the 70s and 80s the farm family had to take on a new look, usually one with the wife and children having to work on the farm also and not hire additional help, or the wife going to town to get a job to supplement the farm income and possibly pick up benefits to help cut expenses. You also saw both husband and wife going to town, getting an 8-hour a day job and going home to farm in the evenings and on weekends. Basically, they did anything they could to hang on.
Trimble stated, “Look with caution at low interest rates. Don’t lose sight of cash flow.”
So now, here we are with these low interest rates and the commodity prices going up, currently for corn. What does that mean?
According to Trimble, the bank will look at financial ratios and interpret them on a pie graph. “Use your operating expense ratio, depreciation expense ratio, interest expense ratio and net farm ratio to come up with 100 percent.”
It used to be a farmer could borrow a million dollars for the year to cover their operation’s expenses, land purchases, interest payments, and machinery upgrades. “Now it takes a million just for operating expenses,” Trimble reflected.
Trimble stated, “Land prices are stable. They are not growing like ten years ago. That equity cushion helped prevent a crisis when we had low commodity prices.”
Yet even with the low interest rates, remember we could be on the verge of another drought. In 2019 we had water everywhere; looking to 2021, we just don’t know.
Trimble went on to say, “Technology and innovation will continue to benefit our Ag producers as well as talking with your financial partners, seeking advice from the other professionals in your business arena and measuring yourself to your industry standards to help guide your decisions.”
According to Stuart Fox, President & CEO of Nebraska State Bank, we have been working with extremely low interest rates for the past 12+ years. This started with the financial crisis in 2008 which dropped short-term interest rates 4.50 percent in a period of only 15 months. Shortterm rates stayed at that level for seven years before slowly increasing 2.25 percent over a three year period before rapidly returning to their lows once the pandemic arrived.
While much of the country was going through the financial crisis, Midwest Agriculture was seeing a golden age from approximately 2008 to 2012 with strong yields and high commodity prices. The result was an incredible increase in Ag land values. Unfortunately, high commodity prices didn’t last and the past several years have been a struggle for farmers and ranchers.
While many predicted a farm crisis similar to the 80s, low interest rates helped to prop up farm values during this time, which helped producers survive until better times come along.
In order to stay competitive in this low rate environment, community banks have had to be innovative in order to compete
with nonbank lenders.
“While community banks must find ways to remain competitive, I think it’s very important for customers to maintain a solid relationship with their bank and banker,” Fox said. “Everyone wants to get the lowest interest rate. However when things get tough, you want a lender and bank that’s going to fight for you. In the case of Nebraska State
Bank, all loan decisions are made locally right here in Custer County.”
Fox continued, “Going into this renewal season, we were bracing for a tough year, however through a combination of government support from the Paycheck Protection Plan (PPP) and Coronavirus Food Assistance Program (CFAP) along with a recent rally on the commodity side, many of our Ag producers
had a solid year.”
When we look back on this year, what will it be, no rain or rain, back to eight-dollar corn of 2012 or double-digit interest? No matter what the crystal ball holds for the Ag producers of our community, they will say “Bring it on,” and keep growing row crops raising livestock and they will rely on their bankers to navigate them through the highs and lows of it all