Ag Finance Topics for Discussion Rodney Jones, Ph.D. Oklahoma Farm Credit Chair In Agricultural Finance, OSU Dept. of Agricultural Economics

We Are In Tougher Economic Times In general more true for crop based operations than for cattle or mixed operations Degree and type of “financial stress” varies from producer to producer Some evidence it is more pronounced in Southern Plains

The Graph Does Not Look Good

Facts and Projections Overall U.S. net farm income forecast to drop 13% from 2017 levels (already less than half of 2013 levels) Southern Plains – some projections down 21% from 2017 What’s unique about Southern Plains? Frequent examples of working capital shortfalls

Facts and Projections Interest costs rising Loans harder to secure Overall debt increasing at a slow pace, but faster for some producers Operating debt increasing more than Term debt Asset Values Equipment Land

Is it the 1980’s Then, very rapid decline in commodity prices along with rapid increase in Interest rates resulted in a very fast farm sector economic downturn that lasted a few years followed by a steady recovery

Or Is There Another Comparison Now, a multi year slow erosion of net income with no end in sight yet We have seen this type of a downturn before – 1920’s – extended (12-13 year continued gradual erosion of net farm income followed finally by a fairly rapid recovery starting in early to mid 1930’s Psychological impacts may be different (even worse in some regards)

Where Do We Go From Here How rapidly will interest rates rise Impact of retaliatory tariffs Widespread production challenges What helped with recovery in the 20’s and in the 80’s Will we see a more global crop shortfall to stimulate a supply related commodity price bump

Where Do We Go From Here Adjusting farm family living expenses What about health care costs For Oklahoma, will the cattle price cycle low point come along while crop prices are still struggling, impacting even our more diversified operations Possible scenarios

Don’t Count on Rapid Commodity Price Recovery at This Point Current projection is that this downturn will last a while longer, and we will likely see modest interest rate increases as well

Industry Observations Purdue University Center For Commercial Agriculture Ag Economy Monthly Barometer Based on a monthly survey of 400 producers nationwide Both the index of current conditions, and the index of future expectations have dropped sharply in recent months Respondents indicate deteriorating financial conditions, reluctance to make investments, trade concerns, and expectations for some rental rate relief

Local Observations Producers are more generally discouraged Advise to surround with positive people Watch for signs of severe stress among friends A larger number find themselves in more serious financial situations Hearing more stories of “calling it quits” Mostly voluntary so far

Aside From Luck or Good Fortune – What Can You Do Every producer has a different starting point story. Some have been in business a long time, have accumulated equity in various forms, have low debt payment obligations, etc. Obviously those are better able to weather the storm.

Carefully Monitor Five Categories of Position and Performance Liquidity, Solvency, Profitability, Financial Efficiency, and Debt Repayment Capacity Most (certainly not all) producers are still in a pretty good solvency position. Cash is getting tighter, many of the short-term strategies have been exhausted.

Crop Budget Realities By my rough calculations: Wheat planted this fall has a better chance of returns above break-even than last year, Canola not much different that last year Soybeans (popular this year) need some price recovery to look very attractive

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