Ag Conference 2017

published by Anton Bekkerman

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Farm Finances In
Distressed Wheat Markets
Farm Finances In
Distressed Wheat Markets
2017 MT Wheat Markets
Moisture Underperformance
Since 1900, June–September 2017 were:
9th driest for major MT wheat production areas
2nd driest for major northeast MT
In past 10 years, average MT wheat production: 188.5 million bushels. In 2017:
127.4 million bushels (32.4% reduction)
48.1 million bushels spring wheat (41.3% reduction)
Only 11% spring wheat rated Good/Excellent quality
National & Global Conditions Didn't Help
Typically expect prices to rise in these situations...
...and they did, until they didn't
USDA reported a less-than anticipated spring wheat reduction
US Wheat Assc report normal wheat quality for U.S. aggregate
Russia and EU exceeded production expectations
Russia's harvest was 333 mil bu higher than 2016 record crop
Solid corn harvest may be crowding out wheat's use as feed 
Data Source: USDA AMS
Visualizing these Market Dynamics
Big Picture Perspective
Source: Creighton University
Where Are We Today?
Results of September 2017 Rural Economy Survey:
Overall economic index remains low because of weak farm incomes
Agricultural lenders have continued to see demand for borrowing
Over 51% of banks restructured farm loans
Nearly 20% of banks raised collateral requirements
Only 2.1% rise in farm loan defaults and 4.1% rise in payment delinquencies
Source: Purdue University; CME Group
Source: Purdue University; CME Group
Source: Purdue University; CME Group
Two measures frequently used to gauge financial stability:
Working capital ratio: 
ability to meet short-term financial obligations
Debt-to-asset ratio: 
longer-term financial leverage capability
< 20% (financially vulnerable)
> 50% (financially strong)
< 30% (financially strong)
> 70% (financially vulnerable)
Source: USDA ERS
Danger zone
U.S. Farm Working Capital and Debt-to-Asset Ratios
In Montana, nearly 40 percent of operations had working capital ratios of 20% or lower in 2014 (USDA ARMS)
Source: Boehlje and Langemeier, Dec 2016
Other Issues Facing Grain Producers 
Increasing number of farms with cash shortages
Tight repayment capacity
Solvency and debt load stable
Land and machinery purchases in early 2010s made on short-term, high payment terms
Off-farm income plays important role, so larger commercial operations may be more vulnerable
Looking Forward to 2018
Potential Strategies for Reducing Short-term Financial Vulnerability
Reduce or transfer short-term debt to longer-term debt
Sell assets to generate cash flow 
Increase revenue or reduce production expenses
A Few Considerations
How will farmers respond?
La Nina winter weather patterns?
NAFTA withdrawal and other de-globalization?
Historical Response to Low Production: Plant More
Since 1919...
Average year-to-year change in MT planted wheat acres:  1.29%
Average year-to-year change in MT planted wheat acres after 20% or more lower production:  5.50%
BUT: much depends on wheat price dynamics in next several months
Potential NAFTA withdrawal and other de-globalization:
    Big Deal for U.S. wheat
Wheat Exported as Percent of Production
United States
(average across 2013/14–2016/17)
Source: USDA FAS
Geopolitical uncertainty can be just as risky as withdrawal
Mexico and Japan have accounted for 18-25% of U.S. wheat exports in the last decade
Anticipating potential NAFTA conflicts, Mexico has looked to others: No longer top importer of U.S. corn and wheat
Expect 1 million bushel wheat import from Argentina (Dec 2017)
Potential to import up to 179 million bushels of corn from Brazil 
Source: Bloomberg
Dec 2017–Feb 2018 Precipitation
Source: NOAA, CPC
Dec 2017–Feb 2018 Temperatures
Anton Bekkerman
[email protected] 406-994-3032