Grand Forks Herald | January 6, 2002 | BY: Mikkel Pates, Herald Staff Writer
If farmers are going to be asked to raise crops at below their cost of production, the public must support them with a farm program.
That's the bottom line for Bob Bahl, and he should know. He's president and chief executive officer for Farm Credit Services of Grand Forks. The farmer-owned lender covers 20 counties in northeast North Dakota and northwest Minnesota, offering a range of short- and long-term loans and other services.
FCS-Grand Forks combined six different organizations in 1985 and today handles $400 million in business, involving 4,000 loan customers and about 1,000 others in financial services. That accounts for 40 percent to 50 percent of the nonsupplier ag financing in the area. Bahl has been with the organization since 1980 and has been president since 1994. It hasn't been an easy time to head such an organization, he said.
ONE-THIRD FEWER
The northern Red River Valley has been hit with significant weather-related challenges - disease and drought. Over that time, we've seen a significant exit of farmers, he said. I'd say a third have left the farm.
The declines have been particularly severe in northwest Minnesota. In some areas the government land-idling program called the Conservation Reserve Program has played a major part in stabilizing farmland values, Bahl said.
We've seen people come in and buy some CRP land at what I would call premium prices, just to own a piece of northern Minnesota or northeastern North Dakota, Bahl said. It's been for recreational purposes and we're talking a few thousand acres.
The 1996 farm bill was supposed to AMTA that made the difference, Bahl said. There's no question there would have been a lot more people who would have had to leave the farm. Instead of a third, I'd say half of them would have disappeared.
Beets and spuds
Even the region's vaunted high-value crops suffered in the late 1990s. Potato production consolidated into fewer hands, after a drought in the late 1980s and loss of chipping contracts on nonirrigated land in the 1990s a shift toward irrigated production for process potatoes. The impact effect was stunning in the northern Valley. There had been more than 1,000 potato growers in the northern Red River Valley 15 years ago, Bahl said. Today there are only 100-plus producers of significance.
Concentrating into that number had a significant impact as people had to retool and move into other commodities, Bahl said. FCS of Grand Forks moved with some of the grower-borrowers as they shifted potatoes in other part of the country, whether it's western North Dakota, Texas or Florida. Fortunately, farmers were able to shift into crops such as canola, corn, soybean, corn and dry edible beans as genetic improvements and weather changes allowed.
On balance
Bahl said that if Congress hadn't come up with ad hoc disaster programs and market loss payments in the 1990s, balance sheets would have been very weak at this point. These programs meant the difference between surviving and not surviving, he said. They didn't bring increases in balance sheet strength but they brought stability for those who remained.
Bahl couldn't say how debt-to-asset ratios have changed but estimated they'd be slightly better for small grains than for others such as potato and sugar beet growers. About half of farm loan volume is in farm real estate loans and half into operating and equipment loans.
In the past five years, parts of the financing for a farmer's operations has shifted toward crop chemical suppliers, Bahl said, but that's not because conventional lenders have backed away. A tremendous amount of chemical, fertilizer and seed suppliers got into financing their basket of services to secure their marketplace presence with the farmer, Bahl said.
They take some of the profits from their chemicals or seed and offer a buy-down interest rate, he said.
With the increased financial stress in agriculture, more players have entered and exited the loan business. Ag credit companies have come into play and some have disappeared. Similarly, farm equipment companies have gone through a period of offering zero percent financing on new and used iron to keep it moving.
Bahl said farmers sometimes can get a better deal by dealing on the price and seeking financing elsewhere - with annual variable-interest rates in the 4.5 percent to 5 percent range, lately.
I've been in this part of the world for 22 years now and, looking back, interest rates are as low as we've seen in many decades, Bahl said. That doesn't create any more demand, just a better deal and less cash out-flow for those who are borrowing.
One of the purposes of direct payments in the 1996 farm bill was to allow farmers to invest in value-added crop processing ventures and wean them from federal price supports.
Value-added blues
In the late 1990s, farmers in the region invested heavily into various value-added programs - American Crystal Sugar Co., ProGold and Dakota Growers Pasta Co., to name a few. Some of these investments haven't turned out the way farmers have hoped. Beet stock values dropped from the $2,700 per share in the years when flamboyant Joe Famalette was president to the range of $800 or $900 a share a year ago. Since then, share prices have recovered to the $1,300 range in late December, Bahl said.
People have become more reluctant to put value-added dollars into ventures, Bahl said. Still, we're going to support people who want to invest in some of these areas as they become available. Value-added is very important to our farmers.
There are some farmers who put $150,000 to $300,000 into these ventures, but the majority put $10,000 to $20,000 into them. They weren't betting the farm on these investments, Bahl said. Most people took a conservative position on this. While they did finance them, it wouldn't be the end of the farm if they didn't turn out.
They hoped to gain some knowledge and some revenues. Some of them gained more knowledge than revenues. Groups on both sides of the border are planning to promote farmer-owned ethanol projects. As we look forward, that's going to be challenging because you're going to need legislative support, Bahl said. FCS of Grand Forks and FCS Ag Country of Fargo both are pushing for better state support of ethanol in Minnesota.
Safety net
Planting flexibility in the 1996 farm bill was certainly welcome, Bahl said. I hope the new farm bill is better and will cover the areas we need. I hope the American people appreciate going to the grocery stores and seeing food on the shelves, and that they support what we do for our farmers.
The farm bill that has passed the U.S. House is geared toward continuing that flexibility and supporting commodities with loan programs. The program supports wheat, barley, canola and sunflower production fairly well and includes countercyclical support, meaning farmers get more support in times of lower prices. The Senate bill that stalled out just before Christmas was geared more toward corn and soybean production. Bahl likes the fact that farmers might have the option of updating their base acres on which they're paid, rather than going to the production of 20 years ago.
There is no question that the farm bills offer better support than the 1996 Agricultural Market Transition Act, often called the Freedom to Farm, but there will still be a gap. Sen. Kent Conrad, D-N.D., said the Senate bill offers a 70 percent increase in farm support over Freedom to Farm, but 26 percent less than the combined support of Freedom to Farm and the ad hoc disaster payments sent to farmers for the last four years.
Bahl said school is still out on how that gap will be filled, but it's still important to have some kind of farm program in place. If there are gaps on the revenue side of it, or if there are places that are not covered, we'll have to deal with that separately as we go forward, he said. FCS is still very much focused on lending based on a farm's ability to pay its bills through income from crops and government payments, but also backed by balance sheet strength.
A unit has to cash-flow, Bahl said. Without that, the farm is going to spend the farmer's equity and that's not good for either one of us.
2002 and beyond
Like everyone who stays in agriculture, Bahl lands on the side of optimism. I'm continually amazed at the resilience of our farmers, at their willingness to try new things in North Dakota and Minnesota, and to work through the challenges they've had. They've taken on the transition of potatoes, the ups and downs of sugar and the diseases in grains, and have moved into new commodities, Bahl said.
With that in mind, we've got the financial foundation to continue to take on those challenges.
Bahl expects farmers to become ever more specialized in raising specific commodities with high value, perhaps contracted at a price before it goes into the ground. That may lessen the potential profit margin the farmer can receive, but it'll make him a certain profit, rather than none.
Still, FCS isn't going to push its borrowers into those contracts but will support what makes financial sense for them. We'll continue to see some consolidation of farm numbers. Fortunately, that's slowed and hopefully the farm bill will make it possible to survive without becoming a mega-farm.
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