1. Ag Finance Situation Overview Rodney Jones, Ph.D. Oklahoma Farm Credit Chair In Agricultural Finance, OSU Dept. of Agricultural Economics

2. Some National Statistics USDA U.S. Net Farm Income –2013 $123.7 Billion –2014 $91.1 Billion –2015 $58.3 Billion (projected) 36 % drop in 1 year, 53 % drop in 2 years

3. Concerning Indicators Total Debt held by U.S. Ag Sector / NFI –2015 6.3/1 (projected) –Recent years well under 4/1 –Have to go back to 1980’s to find a 6/1 Proved to be one of the “early warning” signs of the 1980’s (started to increase to levels above 5/1 in 1977

4. Concerning Indicators Short-term (operating) loan volume up significantly in the last Quarter –Up 24% from a year ago –It’s the “big” loans (over $100,000). Total Ag debt up 9.5%

5. On The Other Hand!! Average Balance Sheets are much stronger –Current average D/E about 15% –Averaged about 20% in late 70’s, peaked at 28.5% in 1985

6. On The Other Hand!! Interest rates are much lower that the era prior to the last significant downturn Right now very few delinquency concerns

7. Global Considerations Significant pockets of economic sluggishness –Brazil, China, etc. –Will likely continue to ripple through ROW, and will impact U.S. –Stronger dollar makes it tougher to compete for export markets

8. Oklahoma Agriculture, Two Very Different Circumstances Cow-Calf sector –Still very strong calf prices from historical perspective, most producers enjoying strong profits The rest of Oklahoma Agriculture Of course, these two groups are not mutually exclusive

9. Message From Producers 2011 – 2012 Drought, but high crop insurance guarantees, kept incomes up 2013 High crop prices, rising cattle prices 2014 Record setting cattle prices, still relatively high crop prices –Not a widespread indication of concern

10. Message From Producers 2015 “Dr. Jones, what do you figure is the BE yield for wheat planted now??” –Read between the words 2015 “Dr. Jones, this sugar cane aphid problem sure makes Grain Sorghum tough to pencil??” –Read between the words

11. Crop Budget Realities Break-even yield for a wheat budget to cover total costs is around 45 bushels per acre!!!!! –Some “low cost” producers may beat that Break-even yield for Grain Sorghum planted this spring looks like it will be 65 to 85 bushels per acre, 80 to 90 for corn

12. Message From Producers “I’m a little concerned” –Multiple years of crop production issues –Low prices –Lingering drought concerns –The edge coming off of calf prices, etc. A Little Concerned!!!!!!

13. Will We See The True Picture The cash accounting performance measures that most producers use and that we rely on are likely to lag true performance. Perhaps by as much as 2 to 3 years as inventories are sold down, pre- payments of expenses are reduced, equipment purchases cease, etc. Ripple effects, Monsanto reducing workforce 12%, Deere sales down 25% etc.

14. First Indicators Will Be Liquidity (Cash Becomes Tight) Operating loans up Concerns about Machinery and Equipment debt.

17. 0.9 % N/A

18. 1.4 % N/A

19. USDA-NASS

21. First Indicators Will Be Liquidity (Cash Becomes Tight) What’s a producer to do? –Manage Cash Flow –Manage Assets –Manage Liabilities

22. What’s A Producer To Do Manage Cash Flow –Family living, supplemental income, delay purchases, negotiate rents, etc. –Ability to respond will be farm specific

23. Kansas Farm Management Association Data

24. What’s A Producer To Do Manage Assets –Sell least productive assets (remember, machinery and equipment values are often the first to decline) –Delay replacement purchases –Lease out underutilized equipment

25. What’s A Producer To Do Manage Liabilities –Negotiate interest only payments for a year –Term out operating debt –Refinance at lower rates –Etc.

26. What’s A Producer To Do Manage Risk –Lock in low interest rates –Manage production risk with higher levels of crop insurance

27. First Indicators Will Be Liquidity (Cash Becomes Tight) What’s a lender to do? –“Shock test” loan portfolio more aggressively –Try harder to sort out true accrual profits –Require more information regarding the long term business plan and the risk management plan at renewal time –Require interim budget vs actual performance reporting

28. Questions??? If you would like to be added to the list for our Ag Finance electronic newsletter, send me an email at rodney.jones@okstate.edurodney.jones@okstate.edu Join us on Facebook at OSUFarmManagment