Farm Credit Live from Trade Talk

Courtesy of The AGgregator, Farm Credit

By Karen Macdonald

From Farm Credit AGgregator

Today, ag journalists at the National Association of Farm Broadcasting (NAFB) convention in Kansas City, Missouri, are stopping by the Farm Credit booth to interview Mark Jensen and Carl Horne with Frontier Farm Credit and Tanner Ehmke with CoBank, which finances ag exports as well as cooperative and rural infrastructure providers.

Here is a preview of some of the insights and expertise on industry trends, challenges and opportunities you might hear in coming days on regional and national ag broadcasts:

International market forces are dramatically impacting domestic grain producers, says Ehmke, a senior economist.

“So far this year, exports have been excellent, in large part because our major international competitors all faced production issues: Brazil with corn, Europe with wheat and Argentina with soybeans,” Ehmke says. “Looking forward, Argentina, Brazil and Russia are all expected to increase their production over the next few years. With the dollar as strong as it is against their currencies, it will grow difficult to compete on the export front.”

Ehmke points out bright spots domestically: grain elevators benefit from the demand for storage, wheat is working its way into the livestock feed mix and ethanol production is at a record high. According to Ehmke, the challenge for producers will be to recognize and take advantage of rallies, which will be brief. Producers will need to know where their profit point is so they know when to sell their inventory.

Jensen, chief risk officer, points out that Midwest commodity producers are facing high cash rents, high overall costs of production, significant levels of machinery debt and increased living expense. Many producers are well-positioned in terms of cash flow and liquidity, but some who were not as strong financially are bearing more of the brunt of the current market cycle.

“We’re working with our customers individually to help each assess their operation and their financial position today, and how they’ll be positioned over the next few years,” Jensen says. “For those in less favorable positions, we’re helping them figure out how they can reduce costs to a more viable level to weather this cycle.”

One ongoing issue is land values, which trended up for many years but are now seeing a lot of variability, though Jensen expects values to regulate over the next couple of years. Dropping land values can mean lower cash rent costs for producers who lease but can signal hardship for owners. In Iowa, for example, 65 percent of farmland is owned by those older than 65 years and nearing retirement, so the upcoming land transfer will be significant. Such an unprecedented land transfer in sight represents a tremendous opportunity for many.

Some purchasers of the land coming available may well be young, beginning or small farmers. Horne, young, beginning and small program and outreach manager, says that there’s a lot of reason to be optimistic. Even in difficult times like what the grain sector is facing, there is much opportunity for those who are prepared.

“Beginning farmers are actively taking advantage of the vast amount of information available to them in today’s environment, gaining more insight and creating more collaboration,” Horne says. “This means we have producers today who are better prepared than ever to access the information that’s available, sift through it, and find perspectives to help them make better decisions about identifying and capitalizing on new market opportunities.”

Horne recommends that all producers – beginning producers in particular – also build a network of advisors, including their lender, accountant and other producers. Sharing information, asking questions and soliciting opinions on new ideas can help identify opportunities worth pursuing, even in a challenging market environment.

Pork Packing Renaissance?

There’s change in the wind for pork producers. Five new pork plants are under development, offering both promise and uncertainty for producers.

  • A processing plant scheduled to open in Sioux City, Iowa, in mid- to late 2017 will handle 10,000 hogs in a single shift, with the potential for two shifts a day – or about 3 million hogs a year. Triumph Foods, a vertically integrated, farmer-owned pork producer and exporter, has teamed up with Seaboard Foods, an international pork producer and purveyor, to build the $264 million processing plant.

    Between 70 and 80 percent of hogs are expected to be sourced from owner farms. Triumph finishes hogs primarily in the upper Midwest, while Seaboard presently has most of its finishing units in the lower Midwest/Plains. At two-shifts, the new Seaboard Triumph plant would match Triumph’s plant in St. Joseph, Mo., built a decade ago and the last major pork packing plant to open. Combined, the two companies would represent the second-largest hog producer and rank in the top five processors in the United States.

  • Producers, primarily from the Eastern Corn Belt, are among those partnering with family-owned Clemens Food Group to open a plant in Coldwater, Mich. When the plant opens in late 2017, it also is expected to slaughter 10,000 head a day. Pennsylvania-based and family-owned Clemens and its partners are investing more than $255 million in the plant.
  • Expected later is a similarly sized plant slated for Wright County in the Webster City area of Iowa. Prestage Farms is investing $240 million and hopes to break ground next spring, with first-shift operations planned to begin in mid-2018. The company plans to source 40 percent of the hogs for the new packing plant from independent farmers.

    Prestage was founded and headquartered in North Carolina by Bill and Marsha Prestage in 1983 but it has had a substantial presence in Iowa for 12 years, with 140 contract production sites in 30 counties in the state. Prestage also produces hogs in South Carolina, Mississippi, Alabama, Texas and Oklahoma.

  • Two smaller pork processors on the edges of our business territory are expected to begin production this fall: Moon Ridge Foods in Pleasant Hope, Mo., which will process 2,000 head a day and Prime Pork, in Windom, Minn., which will process 4,000 head a day.

Market Impact

The United States has lost pork packing capacity of nearly 123,000 head in the past decade and 3,600-plus head a day in just the past year, said Steve Meyer, vice president and pork analyst at Express Markets Inc. Analytics in Ft. Wayne, Ind. But the addition of five plants by the fall of 2018 will add total capacity of more than 9.6 million head a year – or weekly production of more than 185,000 head at one shift per day. This will put national capacity about 8 percent above 2015’s average national weekly slaughter rate, Meyer said.

However, the new plants won’t help the market this fall. Jeff Wiepen, vice president of agribusiness lending at Frontier Farm Credit, cites current supply at more than 6 million hogs, with more coming.

“There is definitely a concern the supply increase will be too fast,” Wiepen said. “Demand is good but exports have not been robust enough recently and growth would be needed to keep prices from falling as more pork pours onto the market.”

Current national capacity is approximately 452,000 head a day, which implies 2.44 million head can be handled weekly this quarter, slightly below last year, according to Meyer. The forecast for the fourth quarter is almost 31.2 million – 2.4 million a week – and every week in December, when the most hogs come to market. So it’s possible the numbers will be larger than currently rated capacity, Meyer said.

“For sure, the next two or three years will be the most interesting for pork producers in quite some time,” Wiepen said.

Preparing Your Game Plan for Cash Rent Negotiations

Two years of declining farm profits and the resulting impact on farmland values is anticipated to influence the upcoming season’s cash rent negotiations. For those entering negotiations in this economic environment, preparation will be key to successful agreements. Dr. David Kohl, professor emeritus at Virginia Tech, recently spoke at our annual Side By Side conference and offered a checklist to help tenants and landlords get organized ahead of negotiations.

  • Have a game plan. Between harvest and the new year, update your balance sheet and start developing a cash flow and breakeven analysis for the next growing season. This is powerful information for tenants because it allows them ask critical questions even before negotiations begin, including: Can I afford to pay cash rent on this land? Tenants who understand their cost of production also are better positioned to have meaningful discussions with their landlords.
  • Pay attention to land practices.  Landlords need to approach their farmland as an annuity, one which needs to be well tended for their future security. It might be tempting to go with the producer who agrees to pay the highest rent. But there can be real value in rewarding a tenant who understands the importance of keeping your grandparents’ farm looking nice. More and more tenants are focused on keeping the rented ground in top condition and keeping landlords informed some now even using drones to give their landlords an overview of what is happening on the land.
  • Set and share your goals.  Separately, tenants and landlords should write their one-, three- and five-year goals. This exercise will allow each side to discuss where goals are similar and where steps might need to be taken to prepare for change. For example, the landlord might be ill and plans to sell the land in the future. This would allow the two sides to discuss whether the tenant could one day buy the land. Or the tenant might plan to take on additional land and bring a daughter or son into the operation.  This could lead to a discussion about how additional operators would affect the landlord-tenant relationship.

Today’s agricultural economy requires a keen focus on costs, including land costs. But Dr. Kohl advises not losing sight of something more enduring than the current down cycle – successful working relationships between landlord and tenant.

“Often,” Dr. Kohl said, “it’s the intangibles that are more important than the financials.”

Supporting Young and Beginning Producers with Education

Frontier Farm Credit and Farm Credit Services of America (FCSAmerica) welcomes more than 200 young and beginning producers to Omaha this week for our Side By Side (SXS) conference. Customers who accepted our invitation to attend this unique educational conference, will spend two days networking with fellow young and beginning farmers and ranchers and learning from industry experts on topics as diverse as financial fundamentals, family business planning and weather management.

Side By Side reflects our commitment to support young and beginning producers. The same commitment is found throughout the Farm Credit System. In 2015 alone, the Farm Credit System originated $9.4 billion in new loans to 62,000-plus young producers, defined as those 35 and younger. Beginning producers – those with 10 or few years of farming experience – represented 22 percent of new loans in 2015, totaling $12.7 billion System wide.

“Farm Credit makes extraordinary efforts to support young, beginning and small farmers and ranchers,” said Doug Stark, our CEO said in testimony before the Senate Committee on Agriculture, Nutrition & Forestry in May 2016. “To put Farm Credit’s lending to small farmers and ranchers into perspective, at year-end 2015 Farm Credit had just over 1 million loans of all kinds outstanding, and slightly more than 500,000 of those loans outstanding were to small farmers and ranchers.”

Follow #SXSOmaha on Twitter, beginning Wednesday evening, to learn what advice industry experts have for young and beginning customers.

Kansas Wheat Harvest Declared Complete

USDA’s weekly report has Kansas wheat harvest at 99 percent, but the Kansas Wheat website’s Harvest Report, sponsored by the Kansas Wheat Commission, Kansas Association of Wheat Growers and the Kansas Grain and Feed Association, pulled the plugs on its publishing last week.

Its bottom line: This year’s bounty has surpassed nearly everyone’s expectations, with USDA July estimate of a 454 billion bushel crop – the sixth largest harvest on record for Kansas, according to the report. “This has just been an extraordinary harvest,” said Kurt Anderson, manager of the Decatur [Kansas] Coop Association. “I think it’s going to turn out to be a once in a lifetime harvest for most of these guys.”

Test weights started out heavy, averaging around 62 pounds per bushel, but they followed the after-rain trend of falling to 57 pounds per bushel. Proteins have been averaging around 11.3-11.4 percent.

For more from the Harvest Report: http://kswheat.com/news/2016/07/18/day-21-kansas-wheat-harvest-report

In the 18 states that harvested 90% of last year’s winter wheat acreage, harvest is 83 percent complete as of July 25. That’s 4 points ahead of average and no state is running late.

Spring Wheat

Spring wheat is the six states USDA tracks is rated 68 percent good/excellent, down 1 point from the prior week. Eight percent is rated poor/very poor. At this time last year, 71 percent was in the upper two categories and 7 percent in the lowest two. South Dakota is the state in the poorest conditions: Its crop is 15 percent poor and only 41 percent good/excellent.

For the status of the corn and soybean crops, visit cropinsurancespecialists.com.