Future proofing your farm finances: strategies for success in an uncertain ag economy

Chris: Welcome everybody to another episode of the Ag View Pitch. We are going to talk business today and we're going to hit on topics such as financial, some of the tax situations, and we got Jared Creed here with us today again to also talk about some of the commodity conditions and, and we're going to lean on Paul. So Paul is kind of our resident tax expert that many of you know. He's out on the road today. I think he's in Sioux Falls now heading for Minnesota, doing a bunch of speaking things. And we've got Jeremy Dutch with us, who a lot of you know, who we've had on a number of times to discuss lending and challenges. And we, in fact, Jeremy and I just released a 19 Minutes here this morning that came out at 5:00 here this morning on the 29th, talking about a lot of things that lenders are probably going to be doing. And we'll talk about some of that stuff here today, too.

But I think what we want to do first is I'm going to pick on you, Jared, and you kind of had the idea for this conversation and thought, well, you know, we need to get a tax expert, a banker, and yourself and myself on here and have kind of a conversation on what things might look like in terms of opportunities, you know, the rest of '24 and going into '25. So Jared, I'm going to have you kind of summarize what, what you think the conversation should look like today.

Jarod

Creed: I think what stemmed the desire to have this conversation is, is maybe unfortunate times coming for some U.S. agriculture producers, but with unfortunate times for some comes opportunity for others. And I would like to think that your listeners, Chris, progressive operators, most of them are probably going to find themselves in a position in the next 12 to 24 months to grow the farm. And a lot of the nuts and bolts that are going to need to be addressed in the next couple years are going to depend on individuals like Jeremy and Paul.

You and I as the cost analysis, the risk manager, so on and so on, we can only do so much, but we still need to play within the, you know, play within the boundaries that ultimately our financial institution, tax implications, etc., etc., you know, kind of a 30,000-foot view conversation to drill it back down into what type of opportunities are coming and what we need to do about it to accomplish those opportunities.

Chris: Sure. Great way to kind of tee us up here. Appreciate that. Let's— Jeremy, I want to start with you, and this will spark some thoughts from Paul then, I think, as well. But, you know, when you think of where balance sheets were at 2 years ago, where working capital was at, and kind of what you saw because of '23, And there's still a lot of grain out there the way it sounds in '23. There are some people that are struggling, having some issues. Talk a little bit about kind of what you're seeing on a 30,000-foot view. What are some of the challenges and opportunities that you're seeing from a financial perspective?

Jeremy

Doetch: Yeah, you know, I think you nailed it, Chris, as far as, you know, working capital. This is, you know, we I've been in a few downturns here. And, you know, the last one was coming off the supercycle of 2012/13 here, you know, and we've had it, we had a slower erosion of working capital, but it certainly was a deeper cut to working capital. The thing that I think for any producer that has held on to some grain here throughout the, you know, probably about a year ago up until about now, I think what I'm seeing across the board, you know, from a balance sheet perspective is just the tremendous amount of erosion of working capital. You know, in the last 12 months, I think it's almost one of the faster erosions to working capital that I have seen in my lending career. So that poses a couple of different challenges, you know, and You know, I've kind of got some notes here.

And, you know, I guess for those that haven't put this assimilation together, you know, if you listen to somebody like Dave Ramsey or personal finance, you know, they always talk about having like 3 to 6 months of, you know, emergency, you know, funding, you know, funds set aside. And, you know, I kind of look at working capital in a similar fashion, you know, on the farm side is that, you know, this is really your staying power and your ability to, you know, weather, you know, the next 3, 4, 5 years. And so it's almost, you know, it's almost a staying power. It's almost a purchasing power if you want to, you know, take advantage of assets. It's also, you know, a little bit of an emergency fund for you, you know, from that side of the, you know, the balance sheet. And, you know, I— what is that— continues to, continues to erode. You know, you've got a couple of different options to that.

You do a little bit better on the risk mitigation, you know, stuff that Jared can help you with., you know, where you really need to recapitalize. And then the other, I guess, you know, side to that on the long-term side of the balance sheet is that, you know, there's a fair amount of operations here, I think, in the last, you know, 4 years or so that may have recapitalized through the favorable rates. And so, you know, there's a— as we see erosion to working capital, we see interest rates go up, and, you know, some equity that might have been harvested over the last 5 years, you know, you certainly got to you know, you really got to be sharp as to the moves you make and how that affects your operation, your balance sheet, your purchase power, you know, your relationship with the bank, and even, you know, your, you know, your tax planning.

So I think it's, you know, hopefully that summarizes a little bit of what I'm seeing on my side of it.

Chris: Paul, Jeremy was talking about some of the challenging sides of things. You're, you're seeing as many farmers as the rest of us all throughout the summer and things in your travels. Talk a little bit about the— what Jared was bringing up. You know, there's, there's these operations that are going to be able to take advantage of some of the challenges that Jeremy just talked about. What are some of the things you're seeing? Are there some operations that are poised from your perspective that you're seeing?

Jeremy

Doetch: Definitely.

Paul

Neiffer: You know, essentially, you know, this, this process of sort of good times and bad times in ag let's go back to the Bible. I mean, we had 7 good years followed by 7 bad years. And the people that during those 7 good years or however many years we have good years that bank that, that income and don't spend it are the ones now they're going to be able to take advantage of the bad years over the next few years or the maybe not so good years. Yes, I was talking to a farmer, oh, I think 2 weeks ago that's getting ready to buy some more ground. They have a bunch of capital that they have banked. And they're definitely taking advantage of people that are getting out of the business. And I think also with the older age of the farmer, you know, I'm almost 65, I'm probably a young farmer these days in some situations.

You know, I think there's going to be more and more older farmers that, hey, we banked some good times, we're ready to get out of the business, and we want to turn it over to a good operation. And I think Jeremy, One thing that I think I notice is if you have a farmer that has very good financial records, is instead of just giving you a simple tax return, you know, they have a set of accrual basis financial statements. I think you're more likely to trust that farmer to know their numbers and be able to bank them versus somebody that all they have is basically a tax return and that's it. So I think for those farmers out there that have good financial records, have banked some money, there's going to be lots of opportunities in '25 and '26 and '27.

Chris: Comments, Jared, on what you've heard so far?

Jarod

Creed: Yeah. You know, I would like to bring up maybe what I think is a very realistic situation out in the countryside. So I hope I don't overstep my knowledge, get over the edge of my skis here. But I look at the last 2 years, 2022 and 2023, are the most expensive crops we've ever planted. 2024, not very far behind. And about 2 years ago, US farmer selling pace on the products they were producing started to slow down. And they went from being ahead of normal pace to behind normal pace. And that has exacerbated itself in the last 24 months and gotten worse and worse and worse. So we find ourselves in a situation, in my opinion here, that Many operators would have sat down with their accountant, sat down with their banker in December, January this last cycle, got the renewals done on their balance sheets. They would have had inventory well overstated from where today's markets are.

And also at the end of the year, they had all this income coming in. So now they're tapping into their operating note to purchase equipment to avoid Uncle Sam. It's no secret what equipment has done in the last 6 months. Land values have, I don't know, maybe softened. It seems like most of the land that's been purchased in the last couple of years is in more solid hands. But now you fast forward to today, sitting on overpriced inventory on a balance sheet, basically bought a whole nother corn crop with the 2024 crop inputs, and soybeans for that matter. And have saw a massive decline in price since those purchases. And it's just all of a sudden, like, we're going to find ourselves this winter of how am I going to actually renew you for a standard operating note this winter?

You've basically saw two crop years evaporate to the tune of at least $1 a bushel in corn, maybe $2 a bushel in beans. And that inventory that was, again, quote unquote, marked too high, how is that going to impact a lot of these producers' ability to get refinanced? When in my mind, I start to think, what equity do they actually have in today's environment, also at a higher interest rate with softer equipment, with possibly softer land? What do they have to go out there and lean against? Or are they going to be finding themselves in a more of a a high-risk lending bucket that, okay, you can go get 8, 9% today, but we might only be able to provide you 11 or 12% because of your financial strain. And I just think that that 4 or 5 bullet points right there is probably a pretty common theme out in the industry. So I'd be curious to know Paul and Jeremy's thoughts on that.

Paul

Neiffer: Well, I think one of my favorite sayings is working capital that you've paid tax on is your working capital. If you haven't paid tax on it, it's either Uncle Sam's or it's Jeremy's working capital. You got to keep borrowing. So, yes, you know, farmers don't like paying taxes. But remember, we want to optimize your tax situation. We want to take advantage of the lower tax brackets. You know, if you don't want to pay self-employment tax, you know, you can work with a CPA to get that down to a manageable number. So too many farmers, like Jared says, last year, hey, we're having a great year. I need to go out and buy equipment. Of course, they took that out of their working capital in a lot of situations. And now that piece of equipment that they paid $400,000 for is maybe worth $200,000 and they can't refinance it anyway.

So, yeah, it's just you got to be prudent about having that working capital, as Jeremy says. Excuse me. I wouldn't want even 6 months. I'd probably want 9 months of working capital if I can get that.

Chris: Comments, Jeremy?

Jeremy

Doetch: I mean, I think, you know, both Jared and Paul bring up really good points. You know, to Jared's, you know, I guess, um, state of the economy on his 5 bullet points, I mean, I don't think he's far off from the stuff that I'm seeing. And, you know, I think there's some real, um, you could, you could, you could be set up for an environment that's real for what, what he's pointing out that are risks out there. You know, whether that comes to fruition or not, you know, it's anybody's guess and things can turn around.

But I think that, you know, those are the biggest risks that we're seeing right now is, you know, a little bit of, you know, and I think that, you know, we've got erosion of working capital, we've got asset values that are declining, you know, we've got tight margins, all of those things that, you know, is, is, is Jared says, we, you know, make the renewal a little bit harder, um, probably for this upcoming renewal season than it has been in a while. Um, and to Paul's point, you know, we do have some, you know, borrowers, uh, I think that are financially strong that have, um, you know, purchased equipment through the line that, you know, are going to, you know, look to term it out. And you're probably right, Paul, the asset values aren't there. You know, maybe they can, you know, they can put about 80% of that purchase price, you know, into a, you know, long-term debt structure.

There's 20% needs to be chewed through for operations or cash injection or, you know, some form of risk mitigation in next year's, you know, cash flow. So all those, I think, pose challenges for this upcoming renewal for sure.

Jarod

Creed: I guess I feel like running the situation of the boy that cried wolf. Yeah, that maybe it's not this year, maybe it's one more year. Things stay really tight. But, you know, just from what you hear on the street, in essence, and all of us obviously talk to a lot of different farms. I mean, I can rattle off a few different bank situations that— not picking on a bank, just, just sharing what they've shared. One of your largest, you know, what do you want to call it, community banks in the state of Iowa, a loan officer pretty much told us point blank that a third of their operating notes will not be renewed without restructuring some long-term debt. As of things, how they sit today.

Another very large financial institution has been actively for the last month training all of their, their underwriters and their loan officers how they intend on handling tighter balance sheets this fall. And then in turn also, you know, I've heard that— I've heard the comments be thrown around that, you know, chattel appraisals are going to go start going through the roof. Because I think that's one of the pieces that's maybe going to sneak up on individuals is we're all talking about this decline in asset values and decline in working capital so fast. It almost seems like in the last couple months, the drop in the equipment side is something that we've never seen before. And you don't have to look very far to look at all the John Deere layoffs, the Case layoffs, so on and so forth, that it just It looks like a deal that, okay, here's all my numbers, how am I going to make it work?

And it's like the bank is only going to have so many options of what they can do. But again, the boy that cried wolf, this isn't everybody. This is maybe that— I don't want to use the word bottom. It sounds pretty discriminatory there. But, you know, your bottom 20-30% of U.S. ag production, and maybe it's going to be a little geographical, maybe it's Maybe it's tied to the extremities of the Corn Belt. But, you know, one of my first bosses in the industry told me a phrase about the farmer that has always stuck with me. They're going to spend the money that they make. The average farmer is going to spend the money that they make. And there's a clear disconnect recently that we're spending it before we're actually making that money to come in.

Chris: Jared, you made an interesting comment there and was get Jeremy's take on this, on depreciating assets. We've seen in the last 4 years a 36.5% inflationary impact on new equipment from which people were updating in '20, from '20 to '20, let's say '23. And then that's kind of shut off now. But we saw a ton of equipment being bought as that inflationary impact was occurring. And then back to what you said, we saw a lot of people change how they market. You know, they, they're marketing on the back end instead of the front end of the marketing window, which has caught up to everything now. What's your take on that, Jeremy, based on what Jared's saying? You know, as far as the difficulty of renewing some of these, what, what things do producers need to be doing, both the ones that are, you know, kind of in the middle?

Because I don't I think we have a lot of people on here probably that are in that bottom, you know, third that Jared's talking about. I think we're speaking right now to those in the top, you know, half anyway, probably, of listeners here. What do they need to be doing? What things do they need to have ready when they come to you? Or maybe they need to be coming to their banker now and having these conversations instead of waiting until it's loan renewal time. What's your thought?

Jeremy

Doetch: Yeah, I mean, I think all points you just point out are positives. You know, I think if you were to paint it with a broad brush of, you know, what to expect, I would expect that this next renewal season is probably going to take a little longer. You know, there's going to be a little bit more due diligence on the bank side, probably, as things get tight, you know, that does that mean, you know, you're, you know, we're going to ask for an equipment appraisal, land appraisal, you know, I don't know, a lot of it depends on your situation. And and how you need to be restructured and things of that sort. But I think you can probably, you know, I think you could probably say that this renewal process potentially could be longer and more expensive with some of the, you know, additional valuations that banks will probably lean on as this gets tighter.

And to that point, you know, I guess it's probably, it's really behoove you to come in earlier. And especially if you've got, you know, this is something that we always talk about the banking industry that, you know, I know, you know, human nature, it just doesn't work like this. But if you, if you have a problem going on in your operation, get in quicker. I mean, it's so much easier to do that, you know, to work with this, you know, as it's coming to light versus, you know, You know, February 15th, you know, you're coming in saying, hey, I got March 1st rents that are due and we have no time. I mean, that's really, really hard to work with. If you know you got a problem, you got a ton of time.

You know, whether you're a combine operator, you're, you know, you watch the, you know, the grain operation at home or whatever your role in the operation is, is that if you have the time to be thinking about this, and you got time to be, you know, putting some bullet points together and getting it in front of a banker during the harvest season, if you know this is coming down, I mean, that's the time to start engaging that conversation so that we can put a plan together that does make sense.

Paul

Neiffer: Jeremy, on the, on the land side, let's say that a farmer, you know, has a decent amount of land. Is the bank more likely to maybe do lower loan-to-value than in the past because they're concerned that pricing or value of land might be going down? Is that a trend that you think might be starting here?

Jeremy

Doetch: Yeah, I think, you know, if you go back to when we came off that supercycle, you know, we saw banks do, you know, they kind of did one or two things, you know, as land values went up. And, you know, I remember, you know, we talked about $300, $350 an acre, you know, rent being high and, you know, $10,000, you know, an acre purchases being high, you know, at that timeframe. And that was kind of a run-up in coming off that supercycle. Super cycle. And, you know, what banks, you know, I think banks were in one of two categories. They either, you know, they may have been aggressive at, you know, let's just say, you know, 75% loan-to-value, um, you know, and, and they, you know, because the land values, you know, they were potentially worried about a, a bubble or some kind of, you know, you know, appreciation that would, would turn into a decline.

You know, maybe they reduced that from 75 to 65%. You know, we saw a lot of that where they adjusted what, you know, their loan-to-value percentages were. The other thing I saw in addition to that was land value caps, you know. And so, and, you know, if they didn't do the adjustment on the, you know, loan-to-value side of it, what they did was they capped the value of what they were going to lend against. And so, you know, for example, during that time frame, you know, if it was, you know, $11,000 purchase price on some land, they were willing to lend up to about $8,000 bucks, you know, an acre. And so they put either land caps or, or did that. You know, at this point in time, Paul, I haven't seen a lot of that being the case.

There's, you know, there's still a pretty, you know, there's still a lot of buyers in the market for land, you know, that I think isn't, you know, really pushing this land value decline so much. You know, I see it more in, you know, obviously channel assets, you know, machinery, that type of stuff, see it in special use properties. You know, if you're wanting to sell off like a 4-acre grain site, you know, that's a storage facility, you know, farrowing buildings, sow units, you know, things of that sort that have some special use, you know, I think that's where we're seeing some, some pressure on some value declines. But, you know, raw, you know, farmland that's producing, there's a lot of buyers in there. So, you know, not to say it can't happen, because we all know it can.

I just don't at this point in time, that price pressure isn't there like it is in some of the other areas of the ag sector I see.

Paul

Neiffer: Well, Jared, if we have cash rents that are elevated, next March, likely they're not going to come down that much. It's really the following March that we're probably going to see cash rents coming down, aren't we? I mean, then they're typically at least a year lag and seeing those rents come down.

Jeremy

Doetch: Lot of lag. 3-year lag.

Chris: It takes a while.

Jarod

Creed: Some of those conversations have already came up and I just tell some guys to get to the negotiation table just so the other side of it sees maybe how drastic the revenue has dropped, just simply take established cash rent last year divided by whatever price corn was for new crop the day you establish that rent, and do that exact same practice at today's and just show, hey, here's how many additional bushels an acre it's going to take to cover your cash rent. And that's eating into the balance of all my other costs. I thought Jeremy brought up something interesting that you know, maybe shouldn't say interesting, but the way of human life, you know, you got a problem like he was saying, a lot of people want to avoid it.

So now you're talking about maybe an impact for the good and the bad individuals here, that the bad, it might take a long time for, uh, everything to come to a head at the bank. And that all of a sudden leaves a situation that has a growth opportunity of possibly bringing in more ground into the operation in the ninth inning going into next spring's planting. And that can create a little bit of windfalls as well. So I almost now think about, hey, we got two different considerations, both with the accountant and with the banker to consider this winter. What do I need to be considering to forecast maybe picking up that additional 5% of ground, maybe that additional 10% of ground?

And I can just off the top of my head here, I can think of two different things of obviously working with a banker, knowing what I'm going to need for working capital to accomplish that, whether I'm renting or buying. And then on the backside, Paul, what do you guys need to be possibly considering around nutrient programs and the possibilities of, you know, stepping into ground that has already had fall fertilizer applications or spring fertilizer applications and what type of impact back and forth do you think we should be considering there?

Paul

Neiffer: Well, and also I think there might be some collaboration opportunities where, you know, you're a strong producer and there's somebody else that maybe is not as strong or getting near to retirement. You know, start having those conversations now to see if that's something where you can make 1 1 3, so to speak. So I think those opportunities can be even more prevalent now than they were the last couple of years.

Jeremy

Doetch: I 100% agree, Paul, you know, because, you know, to Jared's point, I mean, we saw that's almost the exact same thing that I saw. I would say it was probably around that '14-'15 timeframe, you know, in the last downturn, is that, you know, at the last minute ground came up, you know, producers were coming in and, you know, Chris and I talked a little bit about this on the 19 Minutes we did. You know, producers came in and they said, you know, I'm able to pick up another 500, 600 bucks, you know, or 500, 600 acres, you know, sometimes even as high as 1,000, you know, and some of the banks were, you know, they're nervous about that, because they're nervous about how much working capital it takes. And so, you know, some of those opportunities present themselves of getting some, you know, efficiencies.

If you don't have to hire more people, you don't have to bring on more equipment, so you can actually lower some of your costs.

Chris: So I think you need to talk through that aspect.

Jeremy

Doetch: But those are difficult situations where if you can partner and collaborate, you know, that's— I think that's a lot easier transition, and probably a lot better long-term solution of, you know, keeping that ground, you know, and even, you know, potentially leveraging, you know, some other producers' working capital, whether that's, you know, equity labor or equity machinery. You know, those types of things. I mean, I think those are all points to consider, you know, for the producer that's set to grow, you know, you need to be looking at, you know, what's, what's my, you know, best way to grow into this? Because, again, you know, another point that Chris and I made is that, you know, we all look at this and we say, hey, you know, we can look at trying to cut expenses. And there's a lot of efforts that can go along with trying to cut expenses.

But you know, how do we grow the revenue side, or how do we get more efficient on that side too? And I think there's a, you know, instead of just expense reduction cut, we got to figure out how to be more efficient in growing revenue or doing it at a better margin too. So yeah, I think there's, to that point, I think there's a couple different challenges and some opportunities out there for this, this coming spring.

Jarod

Creed: From the, from the marketing aspect, if you have the, uh, if you have the optimism that you're going to have land opportunities come up, it can almost create a situation that you are aggressive, more aggressive even earlier than you normally been in the past.

Paul

Neiffer: Yeah, yeah.

Jarod

Creed: It's almost like a deal of, yeah, maybe you're, maybe you're making a little bit of a bet on a come here, but, you know, being able to market something at a profitable level at a greater quantity that you normally would is going to make that decision to bring that ground in all that much easier, versus the typical process of today's cash price versus this cost. No, it doesn't work. But if I've already accomplished XYZ ahead of time, and to your point, Jeremy, it's going to actually reduce some cost of production. Now, there's a lot of different mental exercises that probably the proactive thinker will come out ahead in this.

Paul

Neiffer: Yeah, and, and I would not be counting on a new farm bill to bail us out. Not right now. So I'm pretty sure we're gonna have the '24 farm bill is going to become the '25 farm bill. And then we'll have a, you know, sometime next year, we'll have a new farm bill. And it depends on the election too. So, you know, we'll see on that.

Chris: One of the things that, Jeremy, you mentioned that I— that we're getting a ton of outreach on, and you were able to participate in one of the meetings, is the interest on collaboration and trying to figure out how to work together just to generate more revenue. The biggest challenge that I see in that area is, is whether or not people have their own business structure together and they have their, their own house in order, because it's easy to start working with somebody and create a cancer because the cultures are different and there can be some clashes and things. But I think done right, we've seen some huge advantages. The math is simple. I mean, if you, if you take account, you know, two people that have equipment that, you know, they're oversized and, you know, and can combine and right-size the equipment fleet, you know, it's the second largest line item expense.

It's the one that we see that gets people in more trouble than anything, you know, Jared brought up. You know, kind of what we've seen. And on the equipment side, in 2015, we did see a big downturn in equipment fleets, and that impacted banks back then, you know, where the balance sheets were too high and things. So I think, you know, the collaboration is one thing. I just wanted to make that comment. The other one is, Paul, you know, touch on the importance of understanding contribution margin because I think it's just something that's noteworthy in this discussion when it comes to picking up those extra acres and understanding the math behind it and just the high-level perspective there, Paul.

Paul

Neiffer: Yeah, you know, certainly, because sometimes people say, well, how in the world could that farmer pick up that land because it's high cost? You know, the cash rent is high. Well, if they're not fully utilizing their fleet and their labor, picking up that land doesn't create any extra costs related to labor, doesn't create any extra costs related to equipment. So, you know, that land's generating, let's say, $1,000 of value or of revenue. But the variable costs, which is what we're interested in, you know, the seed, the fertilizer, the cash rent and so on, might only be $700. So that $300 per acre is dropping to the bottom line that helps reduce that fixed cost per acre.

So, so just because you have high-cost land, if you have excess capacity on both equipment and labor, that is some of the best land that you can pick up because of the fact that you are dropping contribution margin to your bottom line. Anytime you have positive contribution margin— I'm not talking $20 an acre because that, that could be too easy to go one way or another. But if you have $200 to $300 of contribution margin per acre, that is automatically going to go to your bottom line. So that's the type of opportunity you want to be looking at.

Chris: How many people come to you, Jeremy, with that data?

Jeremy

Doetch: Very little.

Chris: Very little.

Jarod

Creed: Uh-huh.

Jeremy

Doetch: You know, I think they do it sometimes in a roundabout way, you know, I don't think they know it, uh, into that, that side of it. But there's a handful of producers that'll say, hey, you know, I think my machinery cost is X. And they'll know that, you know, if they can spread that out over 500 more acres, you know, they can give me an opportunity of how it's better, you know, utilized and how it reduces it. But, you know, I don't know that they, they have really figured out how it hits the bottom line and the aspects that Paul just described.

Paul

Neiffer: Yeah. And sometimes the farmer says, okay, if I get that extra 500 acres, it drops my average machinery cost from, let's say, $150 per acre to $145. And they're still thinking they have that $145 cost. Well, they really don't. You know, they have the— they're going to get that full amount down. Yes, it'll drop the average allocation. But what's important is how much is that extra 500 acres really dropping to the bottom line? And that's where you know, they end up doing allocated costs. And that really doesn't tell you what that bottom line effect is really going to be.

Jarod

Creed: We have that discussion quite a bit internally that I think there's a fine line between the contribution margin on rented ground versus the contribution margin on purchased ground.

Paul

Neiffer: Yeah.

Jarod

Creed: Yeah. And at least in the last couple of years, I don't know if my attitude has really changed on this, that if, if a producer is going to, quote unquote, overpay for something on land, I would much rather still be doing it on the purchase side if they can swing it versus the rented side. Maybe way too many long-term opinions in there from land values, but it certainly seems to be a safer route currently. I mean, what's your guys' thoughts on that?

Paul

Neiffer: You know, you certainly have more control on the purchase side. Again, you know, as long as you have that cushion, you know, you want to have a little bit of a cushion, but you know, in the long term, it's very rare to go broke buying land, you know, in the long term. Now, in the short term, you know, it can be a little bit different. But yeah, no, I agree. And again, you know, sometimes they get caught up with the fact that, hey, our payment is X. Well, part of that payment is principal. It's really a savings account. You know, your net worth is actually going up. So don't get so hung up on what your payment is. It's really what is your true cost of that land.

Jeremy

Doetch: And I would say too, you know, and this is, you know, I think what makes sometimes agriculture tough within the bank versus a CNI or, you know, commercial type businesses that, you know, agriculture has a 12 to 18 month business cycle, you know, versus, you know, somebody that's, you know, producing widgets or plate and screws, you know, may have a 30 to 45 day, maybe 60 day business cycle. So, you know, you get one business cycle in the course of a year versus potentially, you know, 8 to 12. And so on the purchase side, you know, to Jared's point on the purchase side, I just— I feel like, you know, you've got a lot better opportunity to control long-term risk management. You've got a lot better opportunity to build, you know, kind of your business model.

You know, if you go out on a limb, you know, for high cash rent, What's the probability that somebody, you know, behind you is going to be able to, you know, take it away from you for another $20 an acre? You know, at some point, if you had to, you know, grow into that with, you know, another full-time employee or you, you know, you've done something, you know, you know, from that standpoint of expansion and it's gone, that hurts you. Or if you purchase it, you know, you can control that long-term risk management way better on the purchase side than the rent side.

Jarod

Creed: So to make it really, really scary here for a moment, Jeremy, your opinion from the bank level, general US acres. Is there any type of forced liquidation on land options that could arise this winter from some of these distressed balance sheets?

Jeremy

Doetch: You know, I don't know that it's going to be in a massive scale. You know, it's not going to be like it certainly was in some of the, you know, '80s timeframe. But I do believe that there's going to be some producers that might be overleveraged that are going to have to, you know, they're going to have to get some of that equity back out through the, you know, for through a sale. You know, one of the things that I kind of had in my bullet points, and if you kind of go back to the working capital, if you don't have working capital, one of the only ways, you know, to get it is to harvest that equity. Well, if you harvest that equity, you're doing, you know, a couple of different things. You're, you know, you're increasing your leverage and you're also increasing the, you know, the annual debt service coverage ratio.

And does that even really work within today's or to, you know, next year's projected cash flows? And if the answer to all of that is no, then, you know, you might have to sell, sell, you know, a 40 here and an 80 there to recapitalize and get some cash back in just because, you know, you can't make it work on the cash cash flow side and support the additional debt. So I think, you know, I think you're gonna see a little bit of that, but it may not be as, you know, as quite widespread as it has been, you know, in the '80s timeframes. But there's, there's going to be some people that are probably gonna have to make that move to stay alive if they're willing to do so.

Paul

Neiffer: I think there's more buyers out there to do what I call sale leasebacks. You know, they'll find somebody that wants to buy the land, and the farmer knows, hey, I got a 5 a 10-year long-term lease on that ground. Now there's other farmers, probably not the farmers on this call, but there's really other farmers that really should be looking at just liquidating the operation. I mean, they have some equity. You know, it's a tough decision, but they really need to say, hey, I should just liquidate this, get my million dollars of equity and, and go do something else. So, you know, those are tough decisions. But, you know, I've seen too many farms that just hang on, hang on, hang on, and suddenly the you know, the equity is gone and, you know, you have a Chapter 12 liquidation or could be Chapter 12 or they just liquidate it.

So that's, that's something that, you know, that I'm concerned about. And again, you know, you look at the $24 price, Jared, go back to 2014, they are eerily similar. So, you know, we're, we're in that situation where we had a little bit of a supply shock with Russia and Ukraine and, and, you know, that's dissipated. But in the meantime, we still have high input costs.

Jarod

Creed: I'd have to go back and fact-check this. But I was told something interesting last week that Farmer said, well, last time corn was $3.75, I survived just fine. Problem is, last time corn was $3.75, their purchasing power was exactly— our purchasing power today is exactly half of what it was.

Paul

Neiffer: Yep. Yep. And that's the concern.

Chris: I want to have you guys talk about, excuse me, some opportunities. Again, any, anything else that you can think of, you know, kind of like how Jared started the conversation, you know, this, you know, let's think about the top third of these operations that are here that are financially solid, that have, you know, stayed current, Paul, on their taxes. They haven't bulldozed too much of it forward. Everybody does some, but, but haven't done too much of that, and they're in a solid position. Start with you, Jeremy. They're not going to take as long to do their loan renewal and that type of thing, but how far are you going to go with them? What are you going to encourage them to do? What, what do those producers need to be thinking about when they do loan renewals and when they look at the opportunities? How aggressive do they get?

Jeremy

Doetch: Yeah, so there's a couple of things that come to mind on my side. I'm kind of a fan of prepaids where it makes sense. And, you know, especially if you're, you're buying some inputs that we know we need to have, you know, whether it's seed, fertilizer, you know, I want to get something too that's a saleable item that you can, you know, take a unit or something on rather than just giving a blank check to a co-op. But if you could, you know, if you can get it, there's a seed company offering a, you know, 10 to 12, 15%, you know, early pay discount that, you know, you don't have to borrow that on the line. You know, you can pay that, you can turn around, get, you know, some fairly decent, you know, forward pricing strategy on that. I think you can really reduce some costs doing that.

I think those, those moves might be out there that, you know, we've been doing it quite a bit in the past, but we've been doing it with you know, 4, 5, 6% money, you know, borrowing it on the line. I think that, you know, those days are gone. You need to be looking at it with cash rather than borrowed. You know, one of the things that I think is really overlooked is just diversifying your own operation. I mean, you've got, you got, if you're in the top third, you've got plenty of working capital, you got plenty of cash, plenty of equity, you know, and you're wanting to know what makes sense, you know, a lot of times, you know, look at the opportunity cost of where we're at, you know, with interest rates as well.

And, you know, whether you go out and buy equipment, or you invest that into a different, you know, type of strategy that, you know, whether it's a CD or something that's giving you a little bit more, I mean, those opportunities are out there too. And so, you know, if you broaden your mind a little bit, that it doesn't always have to go 100% back into the farm,, you know, it can go elsewhere to help set you up. I think those are strategies as well. And getting in front of a good, you know, tax professional and financial professional that understands ag to help kind of look at what your needs are there.

And then the other thing, you know, I've seen a lot of successful producers, you know, to this point of the lease sale back and a bunch of buyers out there, I've seen a lot of diversity in some producers that have been really, really successful at buying land in different regions and letting, you know, bought from a farmer and that farmer continue to farm it. And so, you know, there's a different income stream too. And so if you want to increase your equity land base and, you know, go on shares or let somebody else do that, and you're, you know, that I think those opportunities are there too. And if you don't want to get into war in your, you know, in your backyard, you know, maybe there's a land purchase that's, you know, 50 miles away that, you know, you know, the, you know, the grower and you're able to buy that, diversify your portfolio, let them farm it.

You know, those types of things. You know, I think that looking a little outside the box at how you can grow and diversify your revenue are great opportunities to look at at this point, because I think we're in my area, you know, there's a ton of— if land comes up, I would bet you there's 100, you know, there's 100 bids that go in on it. And so, you know, instead of fighting those 100 bids, let's, let's get creative as to where our opportunities really are.

Chris: Paul, comments on, on next steps for these, these top producers?

Paul

Neiffer: Yeah, I think, and again, you know, having good financials is great. But I also think this is a people business. And I think being a good neighbor, being somebody that can look at the opportunities out there that maybe you have a farmer, a neighbor that's struggling, be a friend to them, maybe you know, that might lead to something down the road. So again, like I say, if you bring ground up for rent, you're going to have 100 bidders. But if you see that operation, hey, this might be an opportunity, you know, be a friend to them. Don't be a vulture, you know, be a friend to them. And that's something that, you know, may not pay immediate return, but it certainly is probably the best return, in my opinion.

Chris: What about the— any, anything on the tax side of things that, that you're concerned about or that these producers need to be paying attention to? Anything?

Paul

Neiffer: Well, again, I want to make sure that farmers, even in bad times, you know, they need to optimize the tax. They need to pay some tax. You know, you need to take advantage of, like I say, that 12% bracket. That's about $100,000, $150,000 of tax. We're not going to see that probably after the next year or so. So the key is to pay some tax. You know, if you— if, you know, times are bad, this is times to start liquidating some of that excess grain. It'll make the banker happy and you're able to do it at a very low tax cost. So again, convert that to cash, convert it to working capital that's really yours, not the banks or Uncle Sam. So that's certainly a recommendation I would have.

Jarod

Creed: Internally here, Pete Meyer and I, we have been discussing this for months now, that it seems like liquidity, you know, the farmer needing to be liquid, that's a lot different than having 80% of a crop of inventory in a bin. Yeah, the other piece that I think is probably a whole nother discussion outside of this one, but it kind of corresponds with this, is we're talking about these farms that they'll survive this no matter what. Whatever this possible downturn is, they're going to be fine. But it might be more of an elder generation that has the next generation up and coming. And there can be land deals that come about that should be done. But the elder generation does not want to purchase any more ground.

Jeremy

Doetch: Right.

Jarod

Creed: So that's a whole nother gamut. And we've had some success in the last year or two of gently business-minded, kindly forcing that elder generation out, letting, letting them see the greener pasture of get this to the next to kin. The next to kin has the ability now to keep the farm legacy going in the right direction. But it cannot be done without that transition taking place first. And so maybe you know, that's not my expertise. Maybe that's Chris and Paul or whoever. This might be as good a time as any for some of these transitions within these family operations to happen as well. To— I mean, I'm just thinking of one farm in western Iowa, two brothers and their dad, they farm about 9,000 acres total. And they've been renting the dad's ground for the last 4 years, 5 years. Dad finally stopped wanting to buy ground.

Well, now it's time to hang it up and don't be afraid to transition the debt that you still have on a lot of this ground to the younger generation, especially if you can just transfer that interest rate from the refinances done several years ago to that next of kin and across their entire operation, absorbing, I don't know, call it $7 million of debt across $30 million land valuation. You know, it still reduced their overall land costs from what they were paying for rent versus today by about $30 an acre contribution margin, Paul. I mean, yeah. And again, in a family to make it happen as well.

Paul

Neiffer: And again, from an estate tax standpoint, the last thing you want to do is have that generation, the older generation buy anything more because that's just going to cost the next generation 40%. So yeah, definitely.

Jeremy

Doetch: Yeah. And I, you know, Jared, I think you make a good point too, is that You know, one of the things that, you know, I think business finance is different than personal finance. And there's a lot of times where, you know, that generation's hanging on thinking that they have to hand off a, you know, a paid-for farm, you know, to the next generation. And, you know, if that does happen, a lot of the times it's the farm that time forgot, you know, there is an expansion, there isn't, you know, upgrade of CapEx and things of that sort. Yeah, you know, this isn't personal finance where you want to retire debt-free on the farm. There's probably an acceptable amount of debt that needs to go with it. And don't be afraid to do that.

Chris: Right. I want to come back to the liquidity thing for a second with you guys and Jared more specifically here with respect to marketing. We haven't spent much time on marketing. I want to hit on that for a minute. You know, I just had a conversation with Joe Vaklovic on the idea of carry. You know, we all look at, you know, what's the carry from these to March or May or whatever, July, and what can we capture there? And I think a lot of times what is forgotten or what's not thought about is the cost of carry. What's it costing you to carry it? You know, you got the interest cost, you've got storage costs, whether you think you do or you don't, you do, because those grain bins and the facilities and the handling equipment and all that crap needs to be replaced at some point. It doesn't last forever. Even though you're not making payments on it, you still have a cost.

There is also another category in that to manage liquidity or to create liquidity is this thing called opportunity cost. And a lot of times there's producers that, you know, and we talked about this at the beginning of the conversation, where people have a lot of, or not a lot, but they're sitting on on cash, and so they don't become very good salespeople. You know, they're not very good at marketing because, well, I've got cash, I'm pretty comfortable right now, I don't need to sell. And there's some subconscious things that go on in our decision-making in the back of our mind that cause us to not make the decision to sell because we feel comfortable.

There's a cost there, and I have a tool if anybody wants it, just email me, I'll send it to you, where you can go through and figure out what your cost of carry is And what we're seeing a lot of times is the carry is almost never enough when you look at opportunity cost, because you can turn around, especially now— that was different back in '14 because we didn't have as high of interest rates. So we've got kind of a double whammy. We've got higher interest rates and we also have, uh, more opportunity cost. And you combine those two You know, you're looking at 12, 13%, and we don't get that much carry in the market. You know, on the other hand though, and this goes to you, Paul, and then I'm going to shut up and let you guys talk about this, but there are some tax implications to that too though, because, you know, you're bringing the money in quicker.

So then you, you do have some tax implications unless you're doing it through a cash system where you can, you know, defer the payment and that kind of thing. So I'm going to stop there and take your, your $0.02 on this comment first, Jared, and then we'll catch you.

Paul

Neiffer: Well, Jared, I just want to ask you one quick question. You know, people talk about carry, but if you're not locking in the carry, really, aren't you still just speculating? I mean, carry only means something if you lock it in. Otherwise you're still speculating.

Jarod

Creed: So rewind the calendar 2 years ago. There was no carry. Not in corn, not in soybeans. It was all inverted. Yeah. And 2 years ago, I'd have to go back and look, but I'm guessing interest rates 2 years ago were maybe not half of what they were today, but close. Far off.

Jeremy

Doetch: Close.

Jarod

Creed: So now you look at this last year, the crop that might still be in the bin from '23 harvest, there was a carry on the board, there was a modest carry in the cash market, but net of interest, the market was still inverted. And I just happened to— I had to see if the spreadsheet was still on my desktop here. I mean, these are kind of some sickly numbers. Looking at $13.25 soybeans, October 1st, 2023, to carry them until July at 8.5% interest expense, 5.5 cents a month of storage, you were looking at about $1.50 to get there based upon a $13.25 bean. And then when he's talking about the opportunity cost that Jeremy was referencing earlier, you know, outside agriculture investment, you know, you go get 5% on a CD, maybe pretty modest, you can go ahead and tack on another $0.55 a bushel there. So you're talking about $2 a bushel or greater from October 1 to present day.

And you know, in that exact same math on corn, 82 cents a bushel for storage and interest, and add in another 19 cents a bushel from the owner earning 5% on that possible cash, that opportunity cost turns into over $1 a bushel. And it obviously has not helped what the market has done since then. So you look at a carry or lack thereof, cash corn October 1, $4.60. What would I need today to offset all that from the opportunity side? I need $5.60 corn. And that's just not the environment that we're in. And arguably, you know, just adjust these numbers again, I guess I haven't— I don't know if this will work. But yeah, I put $4 corn in a bin this October, and I'm paying that interest and I could still go earn 5%. Now all of a sudden, I need $1 of bushel carry out to July. Opportunity expense, or I need $0.78 a bushel out to July.

The farmer needs to realize that net of interest today and liquidity, again, the point of bringing this up is that there is no carry. You can have extreme basis appreciation over time. But now to both you and Paul and Chris's point, you're betting on the come. If you haven't sold the carry, now you're completely just gambling that price is going to go higher. But if you're at least trying to lock in a carry on the board, you're betting on a come-on basis. But in all reality, you're not able to look at saying, I'm going to sell cash grain today for July of 2025 delivery, what I'm going to harvest this fall. That's not going to be a moneymaker for you. Yeah, there's other things that come into it. I get it. Logistics, what you can and can't do.

But one of the things that's maybe saved our bacon in the last couple of years is just taking a breath for a second and realizing what that interest expense was and getting everything we could possibly have moved as fast as possible. And now you got guys in the summertime says, I don't have anything for my help to do because you moved all the grain from October to March. Now what? Well, that saved you a hell of a lot of money not doing it.

Jeremy

Doetch: Yeah.

Paul

Neiffer: Yeah. That interest is more than the wages you might have to pay the employees, plus you have liquidity.

Jarod

Creed: So, and even if we're talking about, okay, earning 5%, let's just say it's your biggest lender in the US, you know, your Farm Credit System on cash plus, what, 2.5%, 3% today? I might be a tad high there, but that's still money earned versus paying it back to the bank. And all of a sudden you got about a 10% swing there. And that's a meaningful amount of money on an annualized basis when you're spending the amount of money we're spending today.

Paul

Neiffer: A farmer should never root for a carry market because it means it's a crappy market. Yeah, yeah, yeah. And don't root for that.

Chris: The other thing too is, you know, there are liquid accounts out there, you know, not advertising for Vanguard, but like as an example, you know, that's a liquid account that you can take that money in and out the same day. And last time I checked, as of the 29th of July recording this, they're at about 5.25% or a little over 5%, and you can move that money in and out the same day. So it's not like you're tying it up for 6 months and you're like, well, I'm going to be on line of credit, that's going to offset it. Well, there's other tools that you can use too, and, and really benefit you. Comments, Jeremy or Paul, on, on the liquidity thing, and then we'll kind of get to wrapping this up.

Jeremy

Doetch: It's like Good. All right. Well, I'll just take it, you know, to Jared's point of all of the benefits of, you know, getting this sold in, in Paul's as well. You know, the other side of it is that, you know, it's always a lot easier, I think, from a banking side, if you go into your renewal, you know, and you're not speculative or betting on the come, you know, you can get that renewal done, you know, a lot easier as well. So we all know that, you know, we've all outlined the opportunity cost, but you know, what's the headache cost, you know, of going through a tough renewal, um, you know, not having some solutions out there for you?

If you get some of this sold, you get it locked up, uh, you got some future sales, and you're not betting on the come, um, or storing it, holding it in a bin, um, and losing out not only on the opportunity cost, the interest expense, the storage, But it's going to make your life a lot harder at renewal time too, because there's just— there's too much uncertainty. So I think that, you know, you need to take a look at some of that as well.

Jarod

Creed: Yeah.

Paul

Neiffer: Liquidity is like oil in an engine. You know, you really can't have too much. I mean, you maybe could, but once you run out, your engine stops. And that's the same with a farm operation. If you have way too little liquidity, you're basically toast.

Jarod

Creed: And the farmer, you know, they're gonna get caught up on, well, the only way for it to be cash is I had to sell it. And I had this hunch or opinion that markets are undervalued. Go use the tools that every single North America producer, grain elevator, processor, so on and so on. Everybody has access to the same tools. Go use it.

Paul

Neiffer: Yeah.

Chris: So I think this has been a great conversation. Just so we don't go super long. I think this is probably a conversation that maybe we we should reconvene as we get closer and get into fourth quarter and kind of see maybe where the yields are at and where things are, how things are going, where interest rates are at. You know, there's an election coming up this year that looks interesting. It seems like there's new news every 10 minutes and just things to pay attention to. What I'd like to do to kind of wrap up here, and I'll start with Paul and then we'll go to Jared and then excuse me, Paul, Jared, and then Jeremy to wrap up kind of any takeaways, any final comments to producers. What do they need to be thinking about as we head towards harvest? And again, you know, we're optimistic here.

There's going to be, you know, kind of like Jared said in the very beginning, I think there's going to be some distressed operations. We can do like you did, like you said, Paul, we can be a good neighbor. We can try to help some of these people, work with them, create some opportunities. I think collaboration, there's all kinds of things that can be done to make this a good— this challenge an opportunity. And so with that said, I'll start with you, Paul, and have you give us your takeaway and last few words.

Paul

Neiffer: Yeah, I think that most of the people on this call are the ones that are going to be able to take advantage of opportunities. And this is a time not to be a speculator. This is the time to be the business person that that banks their liquidity, so to speak, and then take advantage of it. Jared.

Jarod

Creed: Yeah, I hope I'm not stepping on Jeremy's toes here, what he mentioned earlier, but I think one of the most important pieces is timeliness in all this, whether you're in a good situation or a bad situation. And it's not just at the bank, it's also with the accountant, a mid-year tax review. And if you've made a lot of money the last couple of years, You maybe have found yourself— let's just say you carried margin protection last year as well. You had this big check come in in the middle of the year that you need to start thinking about. What income can I or can I not take going into the end of the year from the accountant perspective? Then go sit down with the banker and say, what money can I actually spend? And really try to tighten in on that last 3 months of expenses.

That it's kind of a pet peeve of mine too, at today's interest rates, that deliver all this grain and I'll tell the elevator, I'll get with you after harvest to see what money I want. Why? Why? Get your money that you know you can take now. Yeah. And then if you need to make some adjustments the last 30, 45 days of the year, so be it. But that takes, you know, that takes a team around you to make sure that you're dotting the i's, crossing the t's of both the bank, both the accountant. And maybe it's even what Jeremy was talking about, too, of finding some of those prepaid discounts. Months, if your financial situation allows you to do so. But don't wait until that time comes. You need to have an idea before you even think about putting the first head on a combine of what money you can actually take in through harvest.

Jeremy

Doetch: Jeremy. Yeah, yeah. Well, you know, Jared stole— both Paul and Jared stole my thunder on that, all of that. You always want to be the first. You always want to be the first. Exactly. I don't have a lot I'll just echo everybody's sentiments. And I, you know, I think that, you know, from a lending perspective, you know, I think everybody, you know, if you've got opportunities that you're thinking coming up, get in early, talk to them. If you've got problems, you know, that you think are on the horizon, get in early, talk to them. The more you can communicate with all of the business partners that you're working with, the better off your operation is going to be.

Jarod

Creed: I'm sorry, I have one last thing I wanted to add in there to kind of, for the good guys here to maybe have those opportunities that land might be coming up, especially if it's for sale. If you get your due diligence done now with the bank, that bank, it might not even be tied to a particular piece of ground that you're looking at today, but they might just give you your old-fashioned, like a real estate pre-approval letter in the next 6 months based upon the information that we have. You got $1 million to go spend if an opportunity comes up. That's a lot different and a lot more confident decision to be made than, oh, now I got to rush to the banker to see if I can actually do this and stress the family out, stress yourself out, so on and so on. Know what you can do ahead of time if those opportunities come up. Yeah.

Chris: All right. Great advice. Great comments. Great takeaways. I think we kind of covered the gamut, kind of speaking to everybody in the ag industry and getting some thoughts and some perspective out there. And I'll definitely think we'll have to get this team back together again as we get toward, you know, kind of into harvest a ways, or kind of where we know how things are really looking. What the USDA tells us and what's actually going to happen will probably be slightly two different things. And demand. And there's just a lot of things out here that we're going to have to pay attention to, some math to do in the meantime. With that said, Jared, really appreciate your time. Paul, appreciate your time. And Jeremy, thank you very much to all you guys. I think this has been a great conversation. And if anybody has comments and stuff, this will be on YouTube.

This will be also obviously on our podcast, The AgVie Pitch. So if you guys have Anything that you have questions on, want to reach out to these guys, reach out to me, let us know. And if there's other things you want us— topics you want us to hit on, let us know that as well. With that said, thanks everybody, and we will catch you again next time on the Ag View Pitch.