A record number of people attended Bell Bank’s AgViews Live agriculture conference in Fargo on Tuesday, July 6, where author and speaker Dr. David Kohl and Lynn Paulson, Bell Bank SVP/director of agribusiness development, shared their thoughts on the state of the ag economy, new mega trends and how to make long-term decisions when dealing with short-term highs and lows.
“One thing you’ll notice with our roller coaster economics is the peaks get higher and the valleys get larger,” David points out. “It not only takes a financial toll, but it also takes an emotional toll.”
When it comes to the agricultural economy, David says he has long-term concerns about:
- United States lack of emphasis on export markets
- China’s rise as a global economic power
- Global trade prospects
- The rise in global ag competitors
David called the current ag economy a “super-cycle on steroids” pumped up by central banks and governments around the world.
After years of depressed commodity prices following the super-cycle years of 2006-2013 and the “black swan” event that was the COVID-19 pandemic, the recent surge in commodity prices producers have been experiencing feels like a phoenix rising from the ashes.
David shared the following in his tips for “fueling the phoenix”:
Producers should spend 5 to 10% of their time planning – including looking at strengths, weaknesses, opportunities and threats across the ag industry and in your own operations.
“You cannot look at your financials once a year anymore,” David warns. “You’ve got to look at them quarterly – sometimes even monthly.”
Visualization and projecting possible outcomes in production, price and cost is an important part of any successful operation, David notes. When projecting, he recommends overestimating money and time by 25%
Working capital is essential to managing around uncontrollable events. David suggests making sure 30% of your working capital can be converted to cash in 90 days.
In stressing the importance of proactive planning for the long-term instead of reacting to the short-term, Lynn pointed out, “Commodity prices can correct overnight, but it takes 5-6 years for expenses to retract. You can get out of profitability really fast.”
The producers who are doing well, he says, are often diversified, mid-sized operations with a decent land base that’s largely paid for, they aren’t afraid to pay income taxes, and they’re just as proficient in marketing, planning and financial management as they are in production.
Those at the most risk are producers with:
- High levels of new debt
- High percentages of land being rented
- Lifestyles the operation cannot support
- Multiple refinances with no changes
- No scenario planning
“Hope is not a marketing plan,” Lynn cautions. “It’s not enough to just be efficient – you also have to be competitive.”
Lynn also warned producers that without government payments, 2020 would have seen the lowest net farm income since 2009. Additionally, he said banks have a lot of liquidity right now, so there are many willing lenders.
“As a borrower, be aware,” he advises. “The open checkbook today may not be there tomorrow.”
Thinking About Buying Farmland? Now is the Time
New at this year’s conference, nationally recognized auction experts Kevin Pifer and Scott Steffes shared their thoughts on surging land and farm equipment values, and they took the “hot seat” to answer audience questions.
Kevin Pifer, founder and president of Pifer’s Auction & Realty, urged producers to develop strategies for the times we live in, saying, “When I think about where we are today with debt financing, we have an unbelievable opportunity, because it’s affordable. The Federal Reserve is going to take away the punch bowl before long, and interest rates are going to slowly rise. Where we are today is as close to ‘free money’ as we’re going to get. Last year’s strategy does not win this year’s championships. Think about how you can leverage these opportunities.”
Scott Steffes, president of Steffes Group, said he believes the next generation of producers will experience transformational changes in agriculture similar to what older generations experienced going from homesteading to horses to tractors to 4-wheel drive.
“A lot of manufacturers want to make tractors like computers,” he remarks. “The autonomous tractor is available today – it’s just a matter of when the market will accept it.”
Scott also noted the economy is not as conducive to accumulating family wealth as it has been in the past, so he advised producers to never sell farmland.
“The No. 1 problem as we go forward is the dilution of ownership,” he comments. “When have land owned by 4 or 5 generations that keep passing it down, it’s not uncommon to have 14 deeds to a 22-acre parcel.”
One of the questions asked was how potential tax policy changes could affect equipment and real estate markets.
Currently, the basis of an inherited asset can be stepped up to its value at the time of the original owner’s death, which reduces potential taxes the beneficiary might owe. If that ends, Kevin says it will create disaster, because it’s been part of many producers’ estate planning.
“We’ve seen an accelerated increase in sellers because of proposed tax changes,” he affirms.
Another hot topic was farmland investors. Kevin replied that while there are investors, 97% of land is still owned by family farmers. Still, he says over next 20-25 years, there are going to be fundamental changes in who owns farmland in America.
“If you have an opportunity, purchase farmland,” he advises. “We all want that nice, new boat or combine, but when it gets down to the fundamentals of economics, the best way to build your balance sheet is with land.”
“If you look at land investing, land is always too expensive,” Scott remarks. “In the ag world, wealth is always in real estate. Machinery is there to make money – not to accumulate wealth.”