Predicting the future of the ag sector is chancy business at best, particularly when grain markets have been strong and cattle markets are seeing some upside. But, according to Danny Klinefelter, Texas AgriLife Extension ag economist, there are some looming factors ag producers need to keep in mind.
One is the ongoing troubles in the dairy sector. “We’re going to see some major defaults on the dairy side,” he predicts. “There’s a significant part of the dairy industry that’s literally upside down. Somebody is going to have to pull the plug.”
The other is in grain production. “We had a run from 2002 to 2008 in corn, soybeans and wheat where you didn’t have to be a good farmer to make money,” he says.
As a result, some grain farms were able to stave off potential problems. “We have had a period of time where there has been almost no voluntary exit from agriculture. We have a backlog of people who stayed in the business, particularly on the grain side and some on the dairy and hog sides, who are about to have a day of reckoning,” he says. “When you don’t have any regular exits for a few years, when the shoe falls, there’s a fairly major exit. And I think we’re going to see that.”
Then there are dynamics at the lender level that will affect ag producers. “One of them is lenders have less appetite for risk. You’re seeing more and better documentation requirements.”
It isn’t that the money isn’t there, he says, it’s what it takes to qualify for it. “You’re seeing increased emphasis on repayment capacity. Part of that is using accrual-adjusted net income instead of cash basis. Accrual-adjusted net income tends to lead cash basis by at least two years in terms of what’s happening at the farm level.”
And lenders are putting more emphasis on working capital and increased risk management at the producer level, he says. “What that means is the producer is going to have to be a better risk manager than in the past. That’s going to be one of the major things in the next five years to determine who is still in the game and who has to exit.”