Ag lenders offer insights on interest rates, risk management and young producers
Photo by Amanda Radke"We need young producers today more than ever before," said Bob Rutten, ag loan officer for State Bank of Madison, MN.
As fuel and feed prices continue to skyrocket, producers struggle to find black in a sea of red on paper. What with input costs increasing, even higher prices for producers don't guarantee profits for farmers and ranchers.
In a sea of uncertainty, Bob Schmidt, North Business Lending senior vice president for Farm Credit Services of America, Steve Dutenhoffer, regional president for Dacotah Bank, and Bob Rutten, ag loan officer for State Bank of Madison, MN, offered their advice and insights on interest rates, risk management and how young producers can get into the business.
"We have sustainable land value analysis data that indicates there won't be a panic arise in the agriculture community like there was in the 1980s," said Schmidt. "Seventy-three (73) percent of all land purchases in 2010 were made by existing farmers, with the investor market slowing significantly. As land prices go up, capitalization goes down. No matter where you go in South Dakota, there are opportunities to diversify your production agriculture plans – whether that be with wildlife, fisheries or hunting opportunities."
Although land prices continue to rise, interest rates remain low, and there lies the opportunity for producers.
"We are seeing interest rates that are historically low, not by rate but by duration," explained Rutten. "The Federal government has kept it low for a long period of time. The last time rates were brought down in 2008, people were worried it would quickly spike back up, or that we might have a double dip recession. What we have found is a slow, steady interest rate that I believe will continue on the same slow, steady pace as it moves upward. Federal fund futures show a probability of a rate increase in May of 2012. I know that sounds like a long ways down the road, but when we have to pay for this nation's growing debt, we will be competing with the government for funds."
Dutenhoffer weighed in on the nation's interest rates, as well.
"If interest rates do go up, interest projection will probably be the smallest cost on an operation, compared to feed and fertilizer costs and cash rent. Interest rates have nowhere the impact on ranchers that input costs have," he said.
It's been said that for a good indication of how the country's economy is doing, simply look at the real-estate market.
"Eighty (80) percent of our real-estate portfolio is fixed," said Schmidt. "From a risk management standpoint, we are glad to see that. Our average working capital is significantly more right now. Providers are doing a better, more sophisticated job of enhancing their overall balance sheet by improving on what's working and liquidating what's not."
Yet, the biggest challenge for agriculture will be identifying the next generation to take over the job of feeding the world.
"Only about 3 percent of the world has really good farm ground," said Rutten. "The size of farms in the U.S. has almost doubled. We need young producers today more than ever before. We missed the Baby Boomers because they saw how tough things were in the 1980s and experienced how bad the crash was. This next generation wants to be in production agriculture."
Schmidt agreed and said it will be important to help foster these young people as they transition into agriculture careers.
"Production agriculture is a great career path," he said. "We have to appeal more to young people in our business. We have to be diligent in our process and look at recession challenges. We have to push the envelope in getting a young person in production agriculture. We are looking at developing networking groups to help those young people who are interested. I would like to see tax laws change, so that it's easier to transfer assets. The age of ranchers that is retiring is getting older and older. These ranchers went through a lot of challenges over the years, and that's hard to let go."
It's no secret that economies of scale are critical to profitability, making it tough for small farmers and beginning farmers to make a go in production agriculture.
"There is a real propensity to look at size," added Schmidt. "Not that bigger is better, but it's sure easier to make a dollar."
Big or small, it's important for all producers to know their cost of production.
"Know your cost of production and know your profit margin," said Dutenhoffer. "I have never seen a rancher fail who has taken in a profit at the end of the year. Get a plan, know your risk and take advantage of available programs. We need young people in production agriculture, and that can be in the non-traditional ways, too. Get creative; build your network."