Q&A with American AgCredit’s regional vice president: ‘Risk management’ key, particularly for young producers
March 25, 2013
Fletcher Monroe's rundown of today's and tomorrow's agriculture industry is dominated by two words: risk management.
The same trends that have made farming and ranching profitable in recent years have also created extreme volatility in commodity prices, and therefore, extreme highs and lows in profits and losses for producers and others in agriculture.
The vice president of American AgCredit's Mountain Plains Region said planning ahead for all best- and worst-case scenarios, and doing so in greater detail, will be critical for ag lenders, farmers and ranchers — particularly youngsters entering the industry — because intense volatility is here to stay.
The ag-lending institution for which Monroe works made its own risk-management move in recent times.
In January 2012, American AgCredit, then with offices in California, Nevada, Kansas and Oklahoma, merged with Mountain Plains Farm Credit in Colorado.
With the merger, American AgCredit grew its combined customer base to about 7,000 members, added a variety of commodities to its portfolios and became the sixth-largest farm-credit cooperative in the U.S. American AgCredit now has four office in Colorado, located in Montrose, Grand Junction, Durango and Greeley.
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With global food demand increasing, agriculture is an expanding industry, Monroe said — especially seeing significant growth in the number of small farms, due to today's "local food movement" — and not experiencing any retraction in other sectors of ag.
Despite that growth, Monroe added, American AgCredit is taking day-to-day risk-management steps — examining fluctuations in land values, commodity prices and input costs, and adjusting its credit standards to "responsibly" provide producers with enough capital in good times and bad.
Monroe also explained American AgCredit is doing what it can to help young producers, because new faces in ag are desperately needed.
The average age of U.S. farmers today is nearing 60, according to the U.S. Census of Agriculture, many don't have descendants taking over operations, and some studies show America is losing about an acre of farmland per minute.
While new farmers are needed, they're struggling to get in the industry.
Of farmers surveyed by the National Young Farmers Coalition, 78 percent ranked "lack of capital" as their top challenge.
Monroe sat down last week to discuss the challenges in agriculture and ag lending. Below are portions of that conversation:
Q: What are the main challenges for ag lenders today?
A: The challenges in agriculture and ag lending today are just the overall costs to operate. Today, it's taking a lot more capital to operate farms, ranches, cow-calf operations, dairies. It's just capital-intense. Cost of production started going up probably three years ago, maybe a little longer. Some of that had to do with the increase in commodity prices.
There's also a lot of input costs that are based on petroleum — fertilizer, tires on tractors, etc., which just started going up.
Then as you got high commodity prices, the cost of return that you needed on livestock, for example, went up.
The other risk we're dealing with here in Colorado, that's affecting all of us, is the drought.
Feedstuffs, if you're in the protein industry; it's going to be extremely expensive to provide and purchase feed for your livestock, whether you're in the dairy, cow-calf, hog, poultry, whatever it may be.
Used to be, for example, in the cattle-feeding industry, you made $50 per head in feeding, or you might lose $50-$100.
Today, you can still make $50-plus per head, but you're able to lose $300-$400 per head.
The volatility has just gotten a lot greater.
It's come to a point where, in my mind, risk management becomes the biggest issue that we have to focus on.
Q: Is there anything helping offset those challenges?
A: The offset of that is, if you need to borrow capital, today the cost of money is at the bottom or low end of the trough.
Also, anyone in the cropping industry has had several good years with record-high commodity prices.
Yes, the input costs have gone up, but they've been able to capture a lot of those commodity prices.
But again, the risk that's out there, and the cloud that's looming … is that your input costs are up so high.
What's your water going to be like to produce the crop?
There's a lot of farmers out there today that are trying to decide how much input do I put into a crop — my whole acreage, do I plant part of my acreage based on the water that's going to be available?
Q: There's a lot of talk about difficulties for young farmers entering the industry. What are those challenges?
A: The biggest challenges for young people, or beginning farmers and ranchers is, again, the capital.
For beginning farmers and ranchers, the best way for them to get in is through a family member expanding an operation or bringing them onto the existing operation.
Somebody new may have the passion to get into it, but the capital requirements are such that they've got to start small.
But when you start talking small, it becomes a viability issue.
How long does it take them to get the operation to be profitable?
So a lot of the beginning farmers and ranchers really have to have some kind of off-farm income stream to support them to get up and going.
Business plans — when you get into it and want to borrow capital to start operations — need to be well thought-out; they need to show not only the upside of what can happen, but also how you're managing the risk.
What happens if there is a drought, a hail storm — something that can offset that?
Again, risk management — whether it be crop insurance, or some sort of rental agreement that allows you to pay off of what you earn or what you produce.
It's all about risk management, especially for the young and beginning farmers, because they don't have fall-back equity to withstand any kind of adversity.
Q: What are lenders doing to help young producers?
A: We offer, what I would call, underwriting standards that are set up for young, beginning farmers.
We have what we call our YBSX program.
We've had reduced underwriting standards to allow them to get into the program.
We also utilize government programs that are out there — Farm Service Agency guarantees.
The FSA has down-payment programs, interest-rate buy-down programs, and we try to work with all of the government agencies out there, making sure we have a good package for them.
Q: What do you see in the future for ag lending?
A: I just think risk management is going play more and more of an important role — not only for us as an organization but also for those producers that we finance.
Again, the more capital it takes, either to grow a crop, or raise a calf, or milk cows, whatever it may be, you have to outmanage the risk.
I would tell you many, many, many years ago … agriculture was just a great producer of commodities.
That's as important today, but managing the input costs and the risk shares an equal footprint with the production side.
Now guys are looking at how can they control their input costs — pre-purchase fertilizer, fuel.
You see a lot sophisticated producers lock up fuel, even trade, prepay fertilizer, etc.
Some of them are now looking out two, three years on commodity prices.
Looking at crop insurance — how can they offset risk of drought, hail storm, catastrophe loss?
They're consulting with specialists.
It's becoming more of a business because of the dollars involved. ❖