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Oklahoma City perspective
The increase in interest rates and the addition of more debt alone will not be what pushes the agriculture industry into a financial decline.
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The 71st American Bankers Association’s Agricultural Bankers Conference was held in Oklahoma City in mid-November. The conference and Oklahoma City both exceeded the expectations of the attendees and sponsors. The following are some of the nuggets and highlights of this year's event.
One banker stated, “Do not be the one without a chair in the red-hot land market.” His point was drawing from musical chairs. When the market corrects, those with no buyers or “no chair” are the ones who suffer financially.
Whether it is land, stocks, or the housing market, buyers quickly disappear in the marketplace when asset values correct. If one is in financial trouble with a lack of working capital and liquidity, sometimes the only option may be to sell the land to buyers seeking a discount. If you are the one with no chair, the discount on asset values can be steep.
In the agricultural economic downturn that occurred post commodity super cycle and pre-pandemic, farms and ranches were required to draw on working capital reserves.
Work conducted by the FINBIN team at the University of Minnesota found that the top-level farms, measured by economic performance, burned through about half of their nest egg of working capital during that six-year period. The bottom 20 percent of producers burned through working capital at twice the rate, resulting in multiple refinances.
The increase in interest rates and the addition of more debt alone will not be what pushes the agriculture industry into a financial decline. These two factors combined with the long-term lower prices and elevated costs may just be the right combination.
Many at the conference indicated that 2024 and beyond could be ripe for a farm economic cycle correction in some commodities and in some areas of the country.
What did top-level producers do over the past decade that allowed them to come out on top? According to the FINBIN database, the following were some of the variables.
Top producers consistently generate $1.00 of revenue with expenses, excluding interest and depreciation expenses, of less than $0.80 on the dollar.
They manage expenses better, particularly machinery costs per acre, and generate five percent more production than their peers.
High profit farms have a working capital strategy to absorb cash flow and profit losses, but also to take advantage of investment and purchase opportunities.
The most profitable producers are very detail oriented and take advantage of risk management programs to mitigate their downside risk and have “base hits" rather than “home runs" in their marketing strategies.
Top level managers, based on business profitability, are generally more educated or have deliberate educational programs and are early adopters of technology. They are also innovative, regardless of technology implementation.
Stay tuned for future articles where we will discuss some more nuggets and perspectives from this year’s Agricultural Bankers Conference.
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