Tri-State Neighbor: South Dakota Farm Newspaper

As producers focused on the health of their crops and livestock this summer - not to mention commodity and input markets - a financial crisis was brewing.

“The whole financial situation really came into focus mid-summer and has been heightening ever since, especially in the last couple months,” said Kent Thiesse, government farm program analyst and vice president of MinnStar Bank, Lake Crystal, Minn.

Thiesse says the recent failure of large investment and financial institutions, along with the rapid drop in the stock market, has had a ripple effect that touches everyone.

“Obviously everyone is impacted because of some of the factors that have moved down through the system. Anyone who has anything linked to the stock market, a retirement account, 401K or IRA, is impacted,” Thiesse said.

South Dakota Secretary of Agriculture Bill Even says the agriculture industry has buffered the rural Midwest from the full impact of the crisis.

“It's fortunate that agriculture has been strong the past couple of years. The agriculture industry went into 2008 with a pretty strong financial position. Having a strong agriculture component has helped the South Dakota economy. It's helped buffer it from some of the problems we are seeing out on the Coasts,” Even said.

According to Thiesse, the recent drop in commodity prices, which he feels may be linked to the financial crisis, is starting to wear on this buffer.

“We've seen a rapid change in recent weeks, with corn and soybean prices dropping nearly 40 to 50 percent since the highs of mid-summer,” Thiesse said. “It's linked to the overall economy. A lot of speculation was built into the grain markets in the summer, including a lot of non-ag investment dollars - same as the oil markets.”

Thiesse says that many producers have already forward priced a significant amount of their 2008 production at higher prices. However, those who don't have to sell their commodities right away, may want to hold onto them and “ride this out.”

Unfortunately, input markets have not followed the commodity markets. This situation, according to Even, makes it difficult for producers to develop a sound marketing plan.

“The real uncertainty is input costs coupled with decline in commodity prices. Cash flow projections are changing week-to-week,” Even said. “Volatility makes it difficult to plan.”

A strong business plan is essential right now, says Doug Stark, president and CEO of Farm Credit Services of America.

“Liquidity is really the name of the game. Producers should build working capital in their operation,” Stark said. “Strong working capital positions will help producers weather these extreme levels of volatility.”

He encourages producers to focus on making adjustments to their operations to help them handle the volatile markets. He says they should not change long-term fixed-rate loans if they have them locked in at attractive levels.

“One impact of this crisis is the cost of funding and lending has increased to some degree. There is an adequate supply, but because of market dynamics, in most cases, the cost of capital has increased somewhat,” Stark said. “Even though we've seen declines in federal funds rate and the prime rate, the cost of capital has increased to businesses and producers.”

Are we repeating the 1980s?

Today's financial situation may remind some of the 1980s farm crisis. Stark says what sets this situation apart from the 1980s is today's agriculture producers are in a much better financial position.

“There is a very big difference between what we are facing today and what we faced in the 1980s - from an ag perspective,” Stark said. “Net farm income, on a national level, the last three years has been among the best on record.”

Even agrees.

“The last cycle we saw was in the 1980s - rapidly escalating input costs, escalating land prices and suddenly declining commodity prices. However, we are in better shape than we were then as an agriculture sector,” Even said. “Our financial ratios are better. A critical distinction is that today's interest rates are low.”

Thiesse adds that producers should carefully utilize any increased profits from 2008.

“This might be a good time to set aside some earned cash income as a shock absorber for 2009,” Thiesse said. “Pay down operating lines of credit or put cash aside in a CD or savings account in the case of short-term cash flow problems.”

Thiesse says he understands that the temptation will be high at the end of 2008 to purchase machinery or other assets in order to avoid higher taxes. However, that may not be a good cash flow strategy for 2009 and beyond.

Along with creating a short-term savings, he also encourages producers to look for ways to control expenses and financial risk as they move into 2009.

“If you have livestock manure, make sure you are fully taking advantage of the nutrients. If you are a crop producer, you may have locked in inputs for '09, but also be watching for 2010. Most experts don't feel the recent drop in fertilizer prices will stay low forever,” Thiesse said. “Livestock producers should look for opportunities to lock in feed costs and some profits when grain commodity prices are down.”

He stresses that communication between producers and their lender is very important during these volatile times.

“Be open and communicate your plans with you ag lender. It's a lot easier to look at alternatives and deal with profit situations on the front side, versus the back side of things,” Thiesse said.

Stark believes producers learned a lot from the 1980s. He says even in volatile times, producers will again weather the financial storm.

“No one knows what the future holds. We believe that long term there is a bright future for agriculture,” Stark said. “We believe that agriculture producers are much more financially astute than they were 20 years ago. Many of today's producers were likely in business then and learned lessons. Today's producers are good financial managers.”