Since 2008, the U.S. economy has remained generally grim as it’s teetered between periods of recession and slight uptick. Industries like manufacturing, construction and realty famously suffered, while others like technology and food weathered the storm less scathed.
But one segment has consistently outperformed the rest throughout this tumultuous period in U.S. history: agriculture.
Given the strength of the industry, banks are eager to lend money to the grain segment, but according to sources at some of today’s leading ag lending institutions, they can’t find the demand.
Many agriculture-related firms are taking cues from the rest of the country’s outlook and are holding on to their cash and putting off large financial moves like expansions or loan refinancing. While there’s nothing inherently wrong with keeping your liquid assets in check, bank execs argue that now may be the best time to revisit your long-range debt terms and invest some of the capital you’ve been holding onto.
Elizabeth Hund, senior vice president and division head of U.S. Bank Food Industries; Galen G. Herr, regional credit officer of Rabo Agrifinance; and Mitch Ferree, president of Regions Bank provided an update of today’s agriculture lending landscape and outlined how to best take advantage of current market conditions.
Feed & Grain: What are the general market conditions for agriculture today?
Mitch Ferree, Regions Bank: On a micro level supplies are down after last year’s drought, and the market is trying to determine if the current crop can refill some of the grain pipeline.
Old crop corn and old crop beans continue to offer some real opportunities to sell because they’re still at historically high levels, but the opportunity to price has not been nearly as lucrative, due to the expectation for a larger crop — which may or may not materialize.
Galen G. Herr, Rabo Agrifinance: The long-term outlook is positive for agriculture, due to the growing demand driven by population expansion and the developments of the Chinese and Indian economies.
When the income of the people in those countries increases, it will lead to improvement in diets and greater demand for protein, which translates into greater demand for feed grain.
F&G: Has this bullish outlook translated into heightened banking activity within the ag sector?
Ferree: With agriculture being as strong as it’s been over the last three or four years, the risk profile of ag borrowers has been very good, but loan demand has been light because operators have strengthened their liquidity positions and don’t need to borrow.
Many in this marketplace have little to no balances on the line because the markets have allowed them to strengthen their financial statements.
Elizabeth Hund, U.S. Bank Food Industries: We are very bullish on the entire ag sector, especially feed and grain. The growing demand for protein is driving demand for feed grains. Low carryover has amplified demand and volatility.
Contrary to popular belief, banks are eager to lend to the agriculture sector. The slow recovery has put a damper on many businesses’ ability to grow and expand, but banks are the engine to get things moving again.
F&G: Are banks reluctant to lend to the grain sector after last summer’s drought?
Herr: As an ag lender, we understand the production risks, and that farmers and agribusinesses can have a bad year, but those clients with good management and good fundamentals are going to be able to rebound following a bad year.
Overall, the grain origination sector has been very stable and a widespread weather event is fairly unusual. The last time we had a drought of this magnitude was 1988, and the following year crop yields were close to trend line. We are looking for business with ag companies with strong management and favorable fundamentals, such as a competitive cost structure, a strong working capital position and a history of profitable operations during the good times. Those are the types of companies that are going to be able to weather the bad year or the short crop year.