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Boom Times for Farmers and Their Bankers

By: Bill Poquette

When the American Bankers Association staged its 100th annual National Agricultural Bankers Conference in Milwaukee last month, the booming farm economy was reflected in the theme, “The Supercycle Ag Banker,” and in the titles for some of the workshop sessions, such as “Explosive Growth in Agriculture,” “Evaluating the New Century Go-Go Farmer” and “Is This Boom Different?”

The extent to which farm banks are benefiting from the explosive growth in the industry that generates most of their loans was detailed by Darwin Melnyk, president and CEO of Iron Solutions Inc. of Franklin, Tenn., a provider of farm equipment market information. In 2011, farm banks’ land and production loans grew 6 percent or $3.8 billion to $72.3 billion. Ninety-five percent of farm banks were profitable; 99 percent were well capitalized; 65 percent had increased earnings; and their return on assets grew to 0.86 percent, the highest since 2008, according to data cited by Melnyk.

He also quoted from a study by HighQuest Partners, a strategic advisory firm focused on the global agribusiness and food industries, to illustrate potential further growth as well as daunting challenges: “To meet the demand of population growth and dietary shifts, farmers must produce more food in the next few decades than they have in the past 10,000 years combined — all the while dealing with limited resources.”

Farms have increased total output by 50 percent since 1982, Melnyk noted. “But we aren’t making any new land,” he added.

Technology continues to change the way farmers operate, and Melnyk cited statistics quantifying the resulting productivity increases. In 1970, 66.9 million acres of corn were planted; average yield was 72.4 bushelsper acre; 4.2 billion bushels were produced from a planting density of 18,000 plants per acre. Last year, 91.9 million acres were planted; average yield was 146.7 bushels per acre; 12.3 billion bushels were produced from 30,000 plants per acre.

Looking ahead to 2030, Melnyk projected 100 million acres planted; average yield of 300 bushels per acre; and production of 30 billion bushels from a planting density of 45,000 plants per acre. The world population is expected to increase to 8.4 billion by that time from 7 billion in 2011 and 3.7 billion in 1970.

The go-go farmers responsible for increased production currently and in the coming years were described by Bob Craven of the Center for Farm Financial Management at the University of Minnesota as hard charging; focused on expansion; willing to take risks; liquidity is usually an issue; and gross income often approaches or is greater than total assets.

Click here to view photos from this conference.

From a data base of Minnesota farms maintained at the center, Craven cited these characteristics of producers in the top 20 percent: gross income of $1.9 million; assets of $4.4 million; 37 percent debt to assets; 46 percent working capital to gross income; $75,500 family living expense; 1,698 acres farmed; 422 acres owned. Significant differences in the bottom 20 percent included 56 percent debt to assets and 5.3 percent working capital to gross income.

The bankers in another workshop were advised by Jason Henderson, Omaha branch executive for the Federal Reserve Bank of Kansas City, that all farm booms are different. Focusing on farmland values, he noted that in the Tenth Fed District there have been two consecutive years of 20-plus percent of land value gains for the first time since inception of the bank’s survey in 1976. Nonfarm investors are active, he pointed out, and farmers are buying at auction. More land is being put on the market and sales are being financed with 20 percent down, he added.

Henderson’s colleague on the workshop panel, Brent Gloy, director of the Center for Commercial Agriculture at Purdue University, called attention to big demand shocks fueling the rising land values, including corn for biofuels and the export of 24 percent of the soybean crop to China last year. “We’re not used to this,” he said.

Gloy is bothered by the relationship between land prices and earning potential and posed the question, “Why would people pay so much for so little?” His data indicates no relationship between land values and expected corn prices. This indicates to him that in the long run, asset values will come in line with income.

Henderson pointed out that farmers’ debt-to-equity ratio is historically low at 14 percent, but Gloy warned this will change. “Watch out for seekers of modified terms,” he said. In addition, there will be a lot of young farmers wanting to get into the business, including some of his students, who are leaving school to take advantage of the ag boom.

Farm booms always end, the pair pointed out in concluding their workshop, and how they end is the big concern. The fundamental forces of super-cycles are demand, supply and leverage. Two important questions to be asked, in their view, are whether income or interest rates be the trigger, and what is agriculture doing to manage the risk?

Bill Poquette is editor-in-chief of BankNews.

Copyright (c) December 2012 by BankNews Media