2010: It’s still not ‘business as usual’ for agriculture

SALEM, Ohio — Let’s start the year as most prognosticators do: predicting what will happen in the next 12 months. But we needed help, so we turned to Chris Hurt, agricultural economist at Purdue University; Tom Schlenker, executive vice president of Farm Credit Services of Mid-America; and Matt Roberts, agricultural economist at Ohio State University.

Here, we share their abbreviated outlook for the coming year.

Will credit be available for farmers and farm businesses in 2010?

Tom Schlenker: There will likely be fewer, but adequate, sources of credit for farmers in 2010. We have experienced some pull back by national, region and local banks, reducing lending to farm business, but Farm Credit Services will grow around 6 percent in 2009 and we will continue to be a reliable lender to agriculture and rural America.

Others including captive financers (such as John Deere Credit) and insurance companies will continue to participate in farm lending, particularly now that the financial markets are stabilizing.

What will be different in the coming years is that lenders (and regulators) will be keeping a more watchful eye on their lending practices. Farmers looking to finance significant capital expansions will see that more equity and liquidity will be required than in the past.

There will also be a higher expectation by lenders that farmers become more adept in using of risk mitigation practices, such as crop insurance programs, in their overall marketing programs.

We will also see grain elevators likely asking that farmers take more of the long-term marketing risk in pricing grain. Financing for specialized poultry or livestock facilities on smaller acres of land will also present some financing challenges unless there is a government agency guarantee.

What advice do you have for farmers in 2010, in terms of farm management?

Schlenker: There will definitely be more demanding standards for credit-worthiness in 2010. Farmers can expect that lenders will want them to demonstrate a higher level of working capital and more equity in their operation. This would suggest that farmers will want to be prepared with a detailed financial and cash flow statement as they make lending requests and investment decisions.

Farmers will want to focus on risk management practices now more than ever. It’s important that farmers to protect their investments and manage their exposure to risk from the uncertainties of weather, yields, and other factors that can cause swings in farm income — whether that’s making sure you have up-to-date crop insurance policies, or life insurance policies, or fixing the interest rate on your farm mortgage while rates are still relatively low.

Is there any good news coming down the pike?

Chris Hurt: For the 2010 crop we’ve seen some moderation to the downside in cost. That particularly will be the case for fertilizers and on-farm fuel costs. At this point, it appears that we’re back fairly close to an equilibrium on the price of grains and the cost of production.

Producers can expect better prospects for recovering costs and having reasonable crop returns.

Matt Roberts: Even though the nation experienced a difficult economy in 2009, it still produced record yields for corn, and near-record production. As oil supplies become increasingly depleted and difficult to reach, ethanol demand is likely to grow.

With all the ethanol plants completed or under construction, the country’s infrastructure already is capable of consuming 5.2 billion bushels of corn, meeting the requirements of the 2007 energy bill for 2017.

Requests to U.S. EPA to increase the amount of ethanol used in a gallon of gasoline could increase demand, and the nation could see its corn used for ethanol increase from 4.2 billion bushels, to 5.2 billion by 2017.

So what’s the bottom line to your 2010 economic outlook?

Hurt: It appears the U.S. economy hit bottom in the summer of 2009 and is now in a period of recovery, which is going to be an important factor for grain demand and prices in 2010.

Recovery is going to be fairly slow. Since a recession means our economic activity dropped, recovery simply means we’re starting from a low level. It does not mean we are back to business as usual.

Schlenker: We will likely see credit become more expensive in 2010, with interest rates trending up over the next three to four years. This will also cause lenders to be more sensitive to risk premium in pricing.

Lenders typically measure loan risk in terms of interest rates and other fees. The interest rate on a loan is many times determined not only by the value of money at that particular time, but also by the probability customer performance on the loan.

If a lender believes a customer is less likely to default — calculated by credit score, characteristics of the loan, type of loan, etc. — they will likely offer a rate respective to the risk.

Though we will likely see the dairy, poultry and livestock industries experience price improvement and even approach or exceed break-even, full recovery is not likely to occur during 2010.

Grain operations will continue to benefit from what appears to be a more favorable input environment, however they’ll will need to monitor closely the changing global supply and demand situation as they make spring planting decisions and monitoring pricing opportunities.

Roberts: Improvements in ethanol production and use should keep the corn market growing. Demand for ethanol will continue to grow, but not as fast as in past years.

Still, more corn will need to be planted over the next few years, with additional acreage to keep up with demand.

Demand for protein likely will keep beans strong, as well, while wheat struggles to find a stable basis.

Corn and soybeans will compete for acres, as global demand for beans continues to be strong, with beans selling about as fast as they’re harvested.

World wheat supplies continue to grow, exceeding use, and any forward prices near or above $5 should be seen as opportunities.