Risk Management in Midst of Agriculture Industry Challenges
Our team evaluated challenges the agriculture industry would face over the next five years in 2013. As we near the mid-way mark, it seems we have more questions than answers.
- Commodity prices dropped over the last couple of years; how low will they go?
- How will places like China and Brazil impact the market going forward?
- And what about farmland values? Why haven’t they dropped at the same rate as grain prices?
The first two questions involve possible future events and make up some risk that we face going forward. While we might not have all of the answers now, we can prepare for the possibilities. To start, let’s answer the last question regarding farmland values.
Over the last couple of years, the number of farms for sale has dropped more than the number of buyers. These buyers have generally been farmers with available cash to invest in the growth of their operations. Investors looking to add a long-term asset to the portfolio are also staying in the farmland market. With that in mind, the demand for farmland is still strong as the supply has decreased. Farmland continues to serve many groups as a viable long-term investment, adding another layer to a diversified portfolio.
Cash and capital are paramount when it comes to farmland. Equity in real estate is an important source of net worth for many farmers. Buyers’ purchasing power grew significantly over the past four years. This power and responsibility didn’t come without its fair share of hard lessons. Many buyers were products of the “land crisis” generation during the late 70’s and 80’s.
During the land crisis, farmers borrowed a significant amount of money to purchase land and lenders financed those purchases. A great deal of emphasis was placed on the borrower’s net worth and less on liquidity; however, much of that net worth was tied into long-term assets including equipment and land. Once land values dropped, net worth eroded quickly. The fact that many of these loans had variable interest rates didn’t help the situation. Consequently, many borrowers faced great difficulty in meeting debt obligations and some found themselves simply unable to make payments.
Now, as lenders work with borrowers on financing farm operations, working capital and liquidity dominate the discussion. Having this available cash is one of the best ways to protect yourself for difficult economic times and it can create opportunities for taking advantage of the good times. Cash and savings provide owners with options, even when we feel like we need to batten down the hatches. Farmers with good working capital positions can continue to be creative in how they position their operation for positive long-term returns. Growers in that situation can feel confident that their risk management strategy is on the right path.
How is your risk management strategy? Are you prepared for the volatile grain markets? Do you feel comfortable navigating through the economic transitions over the next five years? There will always be a great deal of uncertainty in agriculture with more questions than answers. Two things are certain: change is inevitable and no matter what the future holds, Busey Ag Services will be here to guide you every step of the way. With over 145 years of farm management experience, we will develop a sound risk management plan in order to make the most of your farmland investment for the next five years and beyond.