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President's Corner
President's Corner
by Doug Hofbauer
First and foremost I want to thank you for your business and the trust you have placed in your Association to serve your financial needs. We continue to grow at a rapid pace reaching nearly $1.2 billion in loan volume, substantially increasing our share of the crop insurance market, and doubling the size of the tax, records, and business consulting line of business we began in 2007. While those are certainly signs of meeting or exceeding your needs and successfully serving a market, it’s also a sign of increasing demand in a high growth industry – agriculture.
Wow, have I seen agriculture take a “hit” in the media lately. The media pundits are blasting the Farm Bill debate, blaming ethanol and the Renewable Fuel Standards for higher food prices, and even blaming U.S. agriculture for worldwide food shortages and starvation. I guess it only makes sense that if your food costs (incredibly cheap and high quality food by the way) goes up in price, gas prices hit a new record high each day, your home is going down in value, and everything else seems to be going up faster than wages, people are going to look for someone to blame. And yet we know, the agricultural economy is one of the bright spots in our economy today. We continue to import over 60% of our energy needs at unbelievably high oil prices so thank goodness agricultural exports are at least helping the balance of trade.
It doesn’t help that we are in the political season where telling people what they want — versus need — to hear does not always seem to win out over informed and intelligent decision making. It does not take much research to find out that the low value of the dollar and high energy prices have much more to do with increasing food costs than the renewable fuel standards. Independent researchers estimate that 70% to 80% of the increase in food prices is due to those two factors alone and that ethanol may in fact be keeping gas prices as much as 15% lower.
Some pundits even seem to think that our grain and livestock producers have the ability to set their prices on the food sold in the grocery stores. If that was the case, we
certainly would not be seeing the stress in the protein sector — beef, pork, and poultry — that we are seeing today! We’ve known for a long time that only about 19% of the food dollar reaches the farm gate. Most of the added costs (especially energy) occur after leaving the farm gate. The argument that ethanol is causing all farmers to plant corn instead of food crops counters the recent news that wheat production estimates are up significantly for the 2008 crop.
The food versus fuel debate will significantly affect all of us that are either producers or service providers to this industry. It appears even if renewable fuel mandates were out of the picture, the worldwide demand for grain is high and prices would still remain strong. We have significant numbers of customers in the livestock industry that are affected dramatically by increasing feed costs. We have significant numbers of grain producers doing well and taking advantage of higher grain prices.
It’s unfortunate that we have two segments of our industry at odds. In the long term, both segments are extremely dependent upon one another. Historically markets always correct. Profitable periods follow unprofitable periods and vice versa. Commodity margins always narrow as production costs go up. We have to be united as an industry, which requires grain producers to be supportive of a livestock industry that will and must remain a key market for grains. That would also mean livestock producers would support a grain and biomass industry that has at least some promise in delivering energy independence, ultimately building a stronger U.S. and world economy consuming meat products. We just cannot afford to sacrifice one segment of our industry at the expense of the other. How to accomplish that will be an important debate. This debate is better won together than separately.
Our basic philosophy as a lender is to be “Conservative in good times, and Courageous in bad times”. With the paradox we have in agriculture right now, with one industry doing well and another in significant stress, we have the opportunity to do both at the same time! As I said in last month’s article, “Change, opportunity, and risk seem to reside together.”
As you seek to grow your business, you want and need a business partner that can help identify solutions to manage the increasing risks associated with increasing opportunities. We are here to help you find those solutions with an array of products and services specifically tuned to your needs. We know we must earn your trust as a customer and owner of Frontier Farm Credit. We thank you for that opportunity. We thank you for your trust and we certainly thank you for your business.