Monday, December 4, 2017

Be Prepared For the ‘Winter’ of The Farm Economy (DE; AGCO; POT; MOO)

There are a lot of folks seeing green shoots, especially in agriculture equities, Deere being a standout.
The argument against the enthusiasm are the prices received by the farmer, prices which are not showing much get-up-and-go.
And crop prices are the very base of the pyramid on which the whole farm country economy rests.

Here's the press release for the most recent Creighton University's Rural Mainstreet Index monthly report:

Rural Mainstreet Index Indicates Economic Weakness:|
More Than One-Half of Bankers Boosted Farm Loan Collateral Requirements
November Survey Results at a Glance:
* The overall index slipped from October’s weak reading and remained below growth neutral.
* The farmland price index fell below growth neutral for the 48th straight month.
* Approximately 22.5 percent of bankers increased farm loan rejection rates with the fall in farm income.
* More than one-half of bank CEOs boosted farm loan collateral requirements as farm income has weakened.
* The percentage of bankers projecting next year livestock revenues greater than costs fell to 9.2 percent from 18.9 percent reported last year at this time.

OMAHA, Neb. (Nov. 16, 2017) – The Creighton University Rural Mainstreet Index dipped from October’s weak reading and remained below growth neutral, according to the November monthly survey of bank CEOs in rural areas of a 10-state region dependent on agriculture and/or energy.  

Overall: The index, like all indices in the survey, ranges between 0 and 100, slipped to 44.7 from 45.3 in October. 

“Since peaking in 2013, farm commodity prices have declined by approximately 17 percent and U.S. farm income has fallen for four straight years. Not surprisingly, Creighton’s overall Rural Mainstreet Index has risen above growth neutral only three times in the past three years,” said Ernie Goss, Jack A. MacAllister Chair in Regional Economics at Creighton University's Heider College of Business. 

Jeff Bonnett, president of Havana. National Bank in Havana, Illinois, “Many of our farm customers experienced record yields with this year's harvest. Like them, we are all hoping that this is enough to offset the yet again low commodity prices that challenge the Ag economy today.”

Bankers were asked this month how their bank has responded to the downturn in farm income. More than half, or 53.1 percent, reported increasing collateral requirements for farm loans. More than one in five, or 22.5 percent, indicated their bank had rejected a higher percent of farm loan applications. However, approximately one-third, or 34.7 percent, reported no change in farm loan terms and requirements....MUCH MORE
And here's the headline story from AgWeb, Nov. 28:
It’s no secret the farm economy is in a downturn. Have you ever compared the cycles in the farm economy to the seasons of the year? Ag Economist Dr. David Kohl does.
“That period from 2006 to 2012, she was the summer,” he explains. “High commodity prices in every major commodity.”

He then says the period from 2013 to today is what he considers to be the Fall season.
“In other words, commodity prices are in an elongated kind of reset,” he says. “People have been pretty resilient because they had built up working capital and of course land values who were strong, so we had some equity on the balance sheet.”

Unfortunately, Kohl says 2018 to 2021 is going to be like a cold winter.

“What I'm starting to observe in this winter period is that I've got a certain group of producers that have made adjustments and they're making a little money,” he explains. “I've got another group, I call them kind of the bridge, and they’re looking for a refinance. Then I've got another 30 percent of producers out there at the end of the pier and those people burning through land equity etc.”

Fortunately, spring is coming.  He anticipates it to be somewhere from 2021 to 2025.

“I call it the spring of the year because what will happen is we'll weed out the some of the inefficient, some of the less progressive type of managers,” he says adding those businesses will be purchased by the other 40% of producers....MORE
We think 2021 is too pessimistic for the turn, it might be a year or two earlier and yes equities are forward looking instruments but they tend not to look that far ahead.