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The Future of Agriculture from a Financial Perspective 2016 Agricultural Lending Conference New Ulm, MN Gary W. Koch [email protected] Kaitlin M. Pals [email protected] Quote of the Day “I like China. I just sold an apartment for $15 million to someone from China. Am I supposed to dislike them?” Donald Trump “I have to admit that a good deal of what my husband and I have learned about Islam has come from my daughter. As some of you who are friends know, she took a course on Islamic History last year.” Hillary Clinton Quote of the Day (cont.) “There is only one redeeming thing about this whole election. It will be over by November, and let everybody pray that it’s not a tie, for we couldn’t go through with this thing again.” Will Rogers Macroeconomic Indicators—U.S. Economy 2015 GDP Growth Rate 2.6% 2016 growth trending lower than predicted Post-2009 U.S. GDP Growth Rate slower than during recoveries after the smaller 2001 and 1991 recessions US. Bureau of Economic Analysis, Real Gross Domestic Product [GDPC1] (Seasonally adjusted, billions of chained 2009 dollars), retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDPC1, September 2016. Macroeconomic Indicators—U.S. Consumers With business investment and government spending down, and the strong dollar depressing exports, U.S. consumer spending is all that’s left to drive the economic recovery Macroeconomic Indicators—U.S. Consumers Unlikely that consumer consumption can continue to sustain the economy on its own, especially without real wage growth Ag Economy Outlook The ag sector’s contribution to GDP has declined along with commodity prices Ag Economy Outlook—Harvest Predictions August 2016 USDA harvest estimates: 15.2 billion bushels corn (up 11% from record high) 4.06 billion bushels soybeans (up 3% from record high) Ag Economy Outlook—Commodity Pricing USDA Predictions for 2016: Corn $3.10-$3.70/bushel Combined with record yield, still projecting a 0.4% revenue decrease Soybeans $8.75-$10.25/bushel Beef Cattle: Q3: $116-$120/cwt; Q4: $118-$126/cwt Hogs: Q3: $49-$51/cwt; Q4: $40-$42/cwt Milk: $16.25-$16.45/cwt Broilers: Q3: $0.84/$0.86/lb; Q4: $0.81-$0.87/lb Ag Economy Outlook—Commodity Pricing Projected ARC-County payments for Southern MN/Northern IA: Average $20-$80/base acre corn; $0 for soybeans Calculated using MYA (Market Year Average), which will be finalized on September 30th Projected MYA: $3.60/bushel corn; $8.95/bushel soybeans Note that because ARC-CO is determined on a countyby-county basis, some counties may vary substantially from the projection Example: Projection for Nicollet County = $0/base acre corn; Chippewa County = $50/base acre soybeans Ag Economy Outlook—Commodity Pricing (continued) Experts don’t see any indicia for improving prices on the horizon Ag Economy Outlook—Commodity Pricing (continued) Ag Economy Outlook—Input Costs Cash rent and input costs finally trending downward Modest decreases in seed and pesticide Fertilizer down $5/acre 2014 to 2015; down $41/acre 2015 to 2016 Even with these larger decreases in rent and fertilizer costs, farmers will likely see negative returns on cash rent farmland Ag Economy Outlook—Input Costs Schnitkey, G. "Growth in Crop Costs and Cash Rents." farmdoc daily (6):140, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, July 26, 2016. Export Trends Sluggish economies in Europe and Asia, the strong US dollar, and good crops in Brazil are hurting U.S. exports Export Trends Export Trends Export Trends But long term, exports are the U.S. ag sector’s biggest opportunity for growth Export Trends Ag Industry Health from Bank Perspective While farmers and lenders are managing farm solvency issues fairly well, trends in operating loans raise concerns over liquidity Ag Industry Health from Bank Perspective While there has not been a dramatic increase in severely distressed loans, increase in loans with minor and major payment problems may be early indicators of more severe problems to come Chicago Federal Reserve Survey: 4% of loans have “major” or “severe” repayment problems Kansas City Federal Reserve Bank Ag Credit Survey, August 2016 Ag Industry Health from Bank Perspective Kansas City Federal Reserve Survey: Kansas City Federal Reserve Bank Ag Credit Survey, August 2016 Ag Industry Health from Bank Perspective Kansas City Federal Reserve Bank Ag Credit Survey, August 2016 Ag Industry Health from Bank Perspective Ag lenders weren’t hit as hard by the recession as other small banks, but ag lenders’ advantage is narrowing as other industries slowly recover while the ag industry slides Future Impacts on Ag Industry Trans-Pacific Partnership TPP is a proposed free trade deal between the U.S. and 11 other countries, including Japan, New Zealand, Australia, Vietnam, Mexico and Peru Strongly supported by the most of ag industry TPP countries already comprise 40% of U.S. Ag exports ($63 billion), but many have protectionist tariffs USDA projects TPP’s removal of tariffs and opening of markets would add $3 billion; Farm Bureau estimates $5.3 billion Attempt to prevent TPP nations from cutting trade deals with China Current political climate makes TPP passage very unlikely Future Impacts on Ag Industry “WOTUS” (Waters of the United States) Rule Clean Water Act limits scope of EPA’s regulatory authority to “navigable waters,” which are defined as “waters of the United States”—which isn’t a defined term. EPA adopted regulations to “clarify” what “Waters of the US” encompasses, effective August 28, 2015 Definition is extremely broad, including: Tributaries of water that is actually navigable Water “adjacent to” tributaries, which generally means any water within 100 feet of ordinary high water mark or 100-year floodplain. Waters within 4,000 feet of an ordinary high-water mark and prairie potholes, evaluated on a case-by-case basis Being challenged in several courts by states and industry groups Future Impacts on Ag Industry Antibiotics Usage and Veterinary Feed Directive Rule Compliance required by December 2016 A Veterinary Feed Directive is only lawful if: Issued by licensed veterinarian Vet is “operating in the course of [his or her] professional practice and in compliance with all applicable veterinary licensing and practice requirements” Made in writing which includes certain details (issuance and expiration date, premises where animals located, etc.) The VFD was issued “in the context of a [valid] veterinarian-clientpatient relationship.” No guidance on what “veterinarian-client-patient relationship” means. Does the vet have to have a relationship with the flow? The site? The individual animals?? Interpretation left to state veterinary boards—many of which have few or no large-animal vets Future Impacts on Ag Industry Intersection of Labor Issues and Immigration/ Homeland Security Trends in rural populations show next generation of farm labor isn’t going to be “home grown” Farm labor supply from rural Mexico already decreasing almost 1% per year In 2015, ICE (Immigration & Customs Enforcement) audited more than 1,000 ag companies Farm Bureau estimate of cost of losing all current undocumented workers: $30-$60 billion Future Impacts on Ag Industry Rural Population Trends: Future Impacts on Ag Industry Rural Population Trends: Future Impacts on Ag Industry Other Regulatory Impacts: Clean Air Act Study: In 2005, EPA implemented a voluntary Consent Agreement providing limited releases from liability under the CAA for CAFOs that agreed to fund and participate in air emission studies EPA Finished gathering data in 2011 EPA still has not published its interpretation of the results of those studies, including whether CAFOs are subject to EPA regulation In 2015, Humane Society and others initiated lawsuits against EPA, demanding that EPA regulate CAFO air emissions Future Impacts on Ag Industry Other Regulatory Impacts (continued): OSHA Regulations: Old regulations required employers to keep records of workplace injuries and illnesses onsite, only submitting reports to OSHA upon request New regs require certain employers to electronically submit summaries to OSHA annually. These documents will be publicly available through OSHA’s website. Because Ag is a “high-risk” industry, these regulations, which generally only apply to large companies, apply to ag employers with 20 or more employees at any one site Permitting Process Environmental Assessment Worksheet (“EAW”) is a “short-form” (though usually several hundred pages) report prepared by person proposing certain kinds of construction projects, submitted to MPCA EAW used to determine whether or not a much longer, more thorough Environmental Impact Statement (“EIS”) is required for the project. Though in theory the EAW process can be completed in 9-10 weeks, in practice, requests for supplemental information to the initial Worksheet stretch the process out much longer (6+ months) Process includes public comment period; a few members of the public can delay a project, even if it’s clear there is no issue requiring an EIS “Phased action” rules may prevent construction on the first phase of a project until planned future expansion is also approved. Ag Productivity Trends Since 1948, ag productivity has more than doubled, using 25% less land and 78% less labor Growth for past 60+ years coming from non-land capital (machinery & equipment) and intermediate inputs (seed/feed, fertilizer, pesticide, etc.) In other words, from innovation and technological advances—research and development A small increase in inputs drives makes a big change in outputs Ag output growth average: 1.49% per year Ag input use growth average: 0.07% per year Ag Productivity Trends Ag Productivity Trends Ag Productivity Trends Ag Productivity Trends Ag Productivity Trends Is a slowdown in productivity growth on the horizon? Ag Productivity Trends USDA prediction: Need at least 1% increase in ag R&D funding per year to keep pace with historical growth Will regulatory environment and consumer pressures allow farmers to make use of innovations? What part of these advances and innovations will be needed to make up for efficiency losses created by regulations? Questions??? THANK YOU! This program is not intended to be responsive to any individual situation or concerns as the contents of this presentation are intended for general informational purposes only. Participants are urged not to act upon the information contained in this presentation without first consulting competent legal advice regarding implications of a particular factual situation. Questions and additional information can be submitted to your Gislason & Hunter Attorney or to the presenter of this session.
