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Veteran Advisor

Grain income down, livestock up

Here are a few stories that Jeff Caldwell worked up, late in the week:

 

Incomes Down For Grain Farms, Up For Livestock -- Fed

 

Gas vs. Ethanol

 

Mike

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Honored Advisor

Re: Grain income down, livestock up

 Lenders on Alert 
Monday, November 10, 2014 11:59AM CST 

By Elizabeth Williams 
DTN Special Correspondent 
OMAHA  (DTN ) -- It was standing room only at the American Bankers Association National Agricultural Bankers conference here on Sunday to hear professor emeritus and ag banking consultant David Kohl. More than 750 attendees (the most in the past 15 years) from 27 states are registered for the three-day conference. 

Bankers are worried about the drop in farm profits and the repayment capacity of their borrowers. Kohl observed what makes this downturn different: 

1. The numbers are bigger. "A 10,000- to 12,000-acre operation can go upside down $3 million to $4 million quickly," Kohl noted. 

2. Volatility is greater. Price swings, market factors -- it's all more volatile now. "You need to be on top of this stuff before it gets out of hand and it can get out of hand quickly," Kohl said. 

3. Concentration of debt is greater. "Much of the debt is in fewer hands," Kohl explained. "We don't have a farm debt problem. We have a debt concentration problem." 

4. Interconnectedness of debt is greater. "Some of your borrowers might also own the local John Deere dealership or the local grain elevator," he noted. 

5. Trade and global risk. Kohl thinks this is one of our biggest risks. "When the Ukraine problem arose, rail cars switched to carrying energy, not grain," he said. "China's slow-down in corn imports has a large impact on prices." 

6. Bankers are complacent about the build-up in collateral. "Their five C's of lending are collateral, collateral, collateral, collateral, collateral," which earned a chuckle from the audience. Kohl continued, "If it's a one-year downturn, repayment will be impacted. If it's a two- or three-year downturn, liquidity will be affected. If we see five years of lower prices, collateral will be impacted." 

Bankers will have to be more than money providers in the years ahead. "You've got to be a teacher, coach and facilitator," advised Kohl. "Problems start in the 'go, go' cycle and education starts in the 'whoa, whoa' cycle." Kohl predicts issues will start before financial reports reflect trouble. He advised bankers to be out on farms once a month. "Make sure that 'full bin' is really full." Bankers shouldn't spend all their time on the 4% of borrowers in trouble, he said. They need to monitor their borrowers who are current on payments. 

LIQUIDITY WILL BE A PROBLEM 

Kohl quoted Dale Nordquist, with the Center for Farm Financial Management at the University of Minnesota, who gave a presentation to the bankers earlier in the day, "How to grow working capital: 1. Make money. 2. Don't spend it all." Then Kohl outlined ways to boost repayment capacity. 

"These are lessons we learned in the '80s," he explained: 

1. Cut business cost. "Get better before you get bigger. Attack your four biggest expenses," advised Kohl. One Minnesota banker who farms on the side told DTN he bought conventional seed corn this fall rather than seed with stacked traits and cut his seed bill in half. 

University of Minnesota economist Nordquist showed a sample 1,250-acre corn/soybean farm from their database of 3,600 farms in 11 states' Farm Business Management Associations. By staying with its current 2/3 corn-1/3 soybean rotation, he estimated total 2015 net farm income at a loss of $25,000 on the sample farm. By switching that to a 2/3 soybean-1/3 corn rotation, net income improved to a loss of $6,000 for the 1,250-acre operation. That included a $40-per-acre Farm Service Agency payment on the corn base and no crop insurance payment. 

2. Seek non-farm revenue. This helped in the 1980s, but may not be as helpful now, said Kohl. "Our operations are too large. It's hard to find an off-farm job that pays enough to cover debt payments." 

You can sell assets but farmers may run into huge tax consequences, warned Kohl. 

4. Cut living withdrawals. "When asked, farmers say they spend $30,000 to $40,000 on living expenses. But when we looked at the actual numbers, they were spending $80,000 to $90,000," Kohl said. He believes about one in five grain producers spends more than $200,000 in family living costs. 

"One Nebraska banker told me a young western Nebraska farmer invited the banker to the farmer's condo overlooking the University of Nebraska's football stadium in Lincoln. He had over $1 million invested in the condo and he could name eight other farmers with similar condos," Kohl reported. 

"This one [category] might be a tough one for your borrowers," Kohl recognized. "As my dad told me, 'It's difficult for a cat to go from eating cream to eating skim milk. The cat will leave home.'" 

5. Restructure debt. This is the easy one, said Kohl. Put debt on longer term. Free up cash to improve working capital. 

Kohl has been coming to the ABA agricultural bankers conference for 37 years. He is still optimistic about the future if lenders take this cycle in stride. However, one of his concerns going into the next downturn is the age and experience of bank regulators. "At a meeting I was at recently in Denver, five out of the six bank regulators had less than two years' experience," he said. Hopefully, there are still some people around who remember the lessons learned in the 1980s. 

Elizabeth Williams can be reached at elizabeth.williams@dtn.com    "

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Advisor

Re: Grain income down, livestock up

I see by the clock that it is Sunday morning here. So not to blaspheme and sound "churchy" but that reads like The Old Testament. Talked to a small town Vo-Ag teacher the other day and he said that damned to near his entire high school, town kids and all, are enrolled in his classes. The regional Vo-techs are crammed full of young people set on being agronomists and cooperative account managers. The ones getting jobs are working in hog barns. The supply of retirees will to do seasonal work just to stay involved is drying up by the season. What is written here in this fairly fatalistic report on that conference only scratches the surface of the complexity of the matter.
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Senior Advisor

Re: Grain income down, livestock up

Being a university booster has nothing to do with farm income, just another niche in the bad wrap that unnecessarily gets placed on agriculture from time to time.  I'm sure there are other business owners on university VIP lists that have nothing to do with agriculture and find themselves in a financial crunch from time to time.  I've got several neighbors that are season ticket holders for Kansas State football but none of them (to my knowledge) own luxery suites along the VIP section of the stadium.  It's all about cutting the fat in lean years, it is up to us as individuals to decide what gets cut and what doesn't.  Luxery and entertainment are on my cut first list, but since that is such a small number it wouldn't aid my bottom line much.

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Honored Advisor

Re: Grain income down, livestock up

Warren Buffett’s Berkshire Hathaway Sells Stake in John Deere and Buys More DirecTV Stock

ARTICLE PREVIEW — For full access, register below, it's free

After the market closed today Warren Buffett's Berkshire Hathaway (NYSE: BRK-A  ) (NYSE:BRK-B  ) disclosed its latest stock holdings as of September 30, 2014 with the SEC.

While the value of its portfolio was unchanged at $108 billion relative to the end of June and it continued told hold 46 stocks, there were still a number of changes to take note of.

The buying and selling 
In terms of selling entire positions in companies it formerly held, and making investments in new ones, there were two primary moves made by Berkshire. The biggest was that investors learned Berkshire Hathaway sold its entire $360 million stake in Deere & Company (NYSE: DE  ) , the manufacturer of John Deere tractors

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Advisor

Re: Grain income down, livestock up

Hobby--with so many not wanting to work wouldn't you rather have stock in direct tv rather than Deere? Upside seems to be good for at least the next two years. Just an observation from a simpleton.
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Veteran Advisor

Re: Grain income down, livestock up

These post have been the best for some
Time. Need to be printed and framed.

As for the million dollar condo.....just where
Did he get the money.....didn't the banker
Have the guts to say something?

Kind of similar to the last time we went
Thru this....banker got too greedy....money
Going out the door ........prices drop,...assets
Drop.....now the farmer to blame.



Remember. Takes two to tango
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