The state of the ag economy

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch. We are going today to talk about the state of the ag economy with Jeremy Dutch, who is with German American Bank. We've had Jeremy on before, but before we get rolling here, I do want to let you guys all know that This is going to be a high-level conversation. No pressure, Jeremy, here. But we, we want to make sure that everybody pays attention to the opportunity that you have with 19 Minutes. I'll make sure Mac has that in the show notes here for the podcast and also on YouTube. So if you guys want to subscribe to 19 Minutes, now's a great time to do it as we get close to heading into spring field work. There's 43 episodes in there. It's $30 a month. You can just subscribe to that with your, with your credit card. It's easy to sign up.

You get signed up and then you can access all 43 of those business topics that are in 19 Minutes along with the 9th, the 19th, and the 29th of every month, the 19 Minutes episode comes out. So with that said, let's get going. Jeremy, you are going to first of all talk a little bit about the state of lending as part of the state of the ag economy. So the ag lending sector is probably feeling a little bit of headwinds right now too, right, with where commodity prices are at and the risks and things that has to be managed there. So talk a little bit about what you got going there.

Jeremy

Doetch: Yeah, so, you know, I think you're absolutely right. I mean, you know, I always joke about, Chris, that, you know, everybody's like, you know, you're a farmer and a banker, you know, and to be honest, the two are so closely related that, you know, Sometimes you have a little bit of a timing issue where one sees, you know, deterioration before the other, but the two commodity-based businesses, you know, we deal with, you know, money, and, you know, just like everybody else does with grain and that type of stuff. And so we've got margins similar to how we deal with margins on the farm. And so, you know, I guess to back up a little bit, you know, banking, I think, in general had a tougher year for 2023, and maybe even, you know, Q4 2022, as it was starting to show its ugly head a little bit.

And, you know, one of the things that we struggle with on the lending side is just, you know, how to hold the margin, you know, what we have seen on the rate side, we're starting to just see on the, on the crop side, you know, where you've got some of your costs are exceeding, you know, your revenues, and For us on the banking side, that's been something we've been challenged with. It's just how do we hold margin because of rate inversion? And rate inversion has been here since, you know, July of 2022. And so, you know, quick, quick and dirty of what that is, is that, you know, when, when long-term rates are lower than short-term rates, you usually find a rate inversion. And that's how banks make their money is, you know, obviously we're taking in short-term money and lending it out on the long-term side. And there's usually a margin in that.

But when we're in rate inversion, that becomes a lot more difficult to do. And one of the things that we saw in 2023 that happened to us, and I think this has happened to a lot of different banks, is that, you know, the short-term money and deposit rates had adjusted a lot quicker than any of our long-term rates. And so we got into the, you know, rate inversion infected us a little bit. On the amount of margin that we try to hold and how we make money by matching up short-term with long-term money. And so, for example, you know, I think that, you know, prior to COVID, we were, you know, we were offering some 10-year money. You know, treasuries were about 1.5%, you know, maybe 1.25%. And so, and then when COVID hit, we certainly were, they were a little bit lower than that on the rate side.

So we offered a lot of, opportunity for farmers to be able to lock in some 10-year money at the 3.99% range during those timeframes. A lot of people did. That was a conventional deal that we did internally as we tried to, you know, just look at the best use of our cash. You know, you fast forward, you know, 3 years from that point, and you've got a lot of, you know, long-term debt that's locked in at 2.99%. And if you had to borrow it from the Fed, it'd be 5.5%. So that, you know, that gives you a little bit of a mismatch of where, you know, the earnings were and how that happened. And, and, you know, we can certainly lend out more, you know, at today's rates. It's just, you know, those loans aren't quite repricing as fast as what the cost of funds and deposits did.

So, you know, banking is seeing a little bit of the headwinds and some of that, you know, similar to what I think we're going to see in 2024 on the ag industry. We had a little bit of our bloodshed in 2023. And so when you look at that coupled with liquidity, you know, and the cost of cash, you know, those have been some of our challenges in 2023 is just, you know, we want to preserve liquidity, but we also, you know, cash is at a premium at this point in time. So it's got to be making us, you know, you know, in the banking world, we want it to be making us, you know, an acceptable amount of return. So that's been a little bit challenging.

It's forced us, you know, in the banking sector, I think overall, and when I say us, you know, I'm trying to say more general banking than just German American, but I think it's really forced us to take a look at credit quality, you know, be ready for any type of, you know, potential losses or downturns that we're seeing here. And so, you know, as we move in and we're looking at, you know, 2024, and how, you know, we're going to hit our budget, how we're going to grow, how we're going to hit margin. You know, we certainly want to be— we certainly don't want to peel back growth. We're wanting to, you know, certainly grow, and we've got some pretty aggressive growth goals, but they're all revolving around credit quality.

And so, you know, that's the thing that we're looking at at this point in time, is that, you know, we're wanting to— we're wanting to keep our credit quality where it's at right now. We would like to not, you know, look at any deteriorating type loans or have our loans, you know, continue deteriorate because that ties up capital, which ties up, you know, liquidity, which, you know, is just a, you know, that, you know, just a long-term effect of what, you know, how it affects us in banking. So, you know, I guess if you want to tie that into how it affects the Ag borrower, you know, I think that you're going to see, I think you probably already have seen credit standards, you know, starting to tighten.

I think they're going to continue to tighten up, you know, we're gonna is, is we're looking at the margins we are in the ag sector, I think there's going to have to have a lot more narrative in conversation and even, you know, reports and details around, you know, what the budget looks like, how we're mitigating the downside risk, you know, what, what are we doing on the, you know, economic or the marketing side of things, you know, to take advantage of, of, you know, breakevens if we get there.

And you had mentioned, you know, the agronomy side of it, you know, how do you, you know, a lot of the times us farmers have gotten to a point where we're, you know, we outyield our breakevens, or we, you know, exceed our breakevens by yield and running that, you know, economic trade-off of doing what you needed to get above breakeven or at breakeven, but not throwing so much at it that you've got too much risk as far as what's invested in the crop. So I think those are all topics, you know, that you're going to have to be prepared to discuss with your lender. As we're looking at, you know, tighter margins on our side, you know, liquidity is at a premium, working capital and loan quality, those are all at a premium right now.

And so I think that, you know, if you're coming in with some deterioration, there's going to be a little bit more scrutiny around that, or at least there's going to have to have a lot more narrative and discussions about risk mitigation. The real quick, just the other challenge, and this is just an offshoot of this, is that banking is really changing quite a bit as well. And they're going through a kind of a redevelopment is the typical consumer is looking for some form of digital platform with a lot more access to 24-hour banking. And so as banks are looking at brick and mortar versus their digital platforms, you know, I think there's more money being spent into the digital platform right now than there is actual building stuff. So, you know, one of the other headwinds we have is how do you, you know, how do you train, repurpose staff?

How do you get, you know, the right hours around your drive-up, you know, your lobby hours, and still offer, you know, chat features, 24-hour, you know, service features, things of that sort. Those are all what I would say are 2024 headwinds and things that, you know, are kind of on top of mind in the lending world.

Chris

Barron: Mm-hmm. You talked about a lot of different things there with respect to the, you know, what the banks are dealing with. One thing that I think is kind of a common maybe myth or whatever with producers, and I've probably been guilty of this too, you know, sometimes as interest rates get higher, it makes the consumer or the borrower feel like, well, your margin is getting better because the rate's higher. Why is it not getting better with the rate higher? And I think, you know, as you related it back to farming, it's kind of that way too. I think sometimes landowners that are especially the absentee ones, well, your price is higher. Why is your— why are you not making more money? Why can't you pay me more cash rent? It's, it's kind of the same thing, isn't it?

You know, you guys are are dealing with, you know, increased expenses, be it different avenues or different reasons for that. But you're, you know, you talked about that, that inversion. I think that inversion is something that I think a lot of times people don't understand exactly how the banks make money and how they get, you know, if they're going to loan us money, you kind of got to stay in business to be able to loan us money to be able to operate and I think access to capital is the next thing I want to ask you about on the lender side, then we'll get to the farmer side of it. But, you know, you guys have to have access to capital as well, right?

Jeremy

Doetch: Yeah.

Chris

Barron: Talk a little bit about the, you know, possible headwinds in that area as well.

Jeremy

Doetch: Yeah. So I think, you know, a lot of banks, they, you know, they can, they could probably fund their loan. It's all, you know, our access to capital is all, you know, how we fund our loans, you know, make a lot of money on the loan side. And so, you know, we can fund loans internally through the deposits that we currently have on the, you know, on the books, or we can go out and borrow it from different borrowing sources. And, you know, when you hear the, you know, base prime, you know, rate lending, you know, at 5.5%, you know, that's usually kind of the, you know, if you wanted to borrow it from the Fed or the Federal Home Loan Bank, you know, you're in those general vicinities of what the bank has to borrow.

You know, one of the side of it is, you know, if you keep an eye on CD rates, you know, if there's wherever the CD rates are, you know, you could run some specials, you can get some, you know, working capital liquidity in that way. That money tends to be fast and furious. You know, it's a very competitive market. So if you want to offer a 2-year CD rate, you know, that potential for that, that liquidity to be gone 2 years if you're not the best deal in town. So there's always You know, there's a bunch of funding sources or access to capital through those means, and those are probably some of the, you know, the, the, some of the easiest ways to get it, um, is, is through the Fed, through some kind of federal home loan bank, um, or through deposits.

And, and, you know, that's, that sometimes is, is the challenge, is, you know, especially in a rate environment where you're increasing, is it— and that's what happened in 2023— is it You know, as you saw the prime rate move so much and we had the liquidity crisis we did, a lot of banks were offering CD specials to attract more money into their bank. And that just, you know, that drove the market from a supply and demand with the rates up because there were so many, you know, so many banks vying for, you know, X amount of dollars to continue to fund loans as opposed to borrowing it from the Fed. And And so as that market kind of exploded, you know, that, that's where I was saying that it, it didn't necessarily match up with where our margins repriced.

And so the easiest example I could tell you is that, you know, you know, a lot of the times banks will say, we'd love to make 3% margin over our cost of funds that, you know, that covers the, you know, obviously the profit to our shareholders, but also covers the admin expenses, you know, FDIC premiums and, you know, everything else that goes along with that. And you know, there was a point in 2023 where, you know, cost of funds were in that 5 to 5.5%. But, you know, because we had rate inversion, the 10-year Treasury and where that market was, you know, that didn't come along for the ride. And so, you know, instead of having it at 3%, maybe it was a 2% margin of what the, you know, the market was bearing on 5-year money at that point in time.

And there's been some of that that's improved, but it's still it's still not back to normal in the banking world like it was previously to, you know, July— I think it was around July 4th of 2022 is when we've been in this inversion, and it just hasn't quite, you know, flushed itself out at this point.

Chris

Barron: Interesting. So I think what we're going to do now— I appreciate that, that count, those comments, and it's interesting to kind of see where the state of the lending industry is so that we can talk about what does the state of the ag industry or, or the producers and the agriculture industry in general, because there's a lot of, a lot of money being borrowed and going to need to be borrowed in the next couple of years, assuming commodity prices stay low and it takes a while for these input costs to come down in line. And so there's gonna be a lot of red ink, I think, in the next year or two, which is gonna, gonna be burn rates significantly higher than what we've seen in, in, for quite some time now, for probably the last 4 or 5 years.

And I think I want to start, though, with a couple of comments you made on the, on the state of the lending industry as it relates to where we go with farmers. Now, you made a comment, credit quality. Okay. So that's an important word and it's an important thing for us to be thinking about with respect to defining that. So what I'm going to ask you to do right now And not to throw you under the bus or put you on the spot, but, you know, define for the producers here, what is credit quality? What are you looking for? You know, it's the 5 C's or whatever, but, you know, you know, dive into that just a little bit and explain what credit quality means to the producer.

Jeremy

Doetch: Yeah. So you hit it. You know, if you've ever— if you ever get, you know, if you can't sleep at night and you're looking for a good read to put you to sleep, you know, you can Google the 5 C's of credit, you know, and You know, but that's the, you know, that for the, for the bank here, you know, those are kind of the important things, you know, um, is the 5 C's of credit. And, you know, you really are looking at, um, you know, cash flow or capacity, you know, a lot of the times that's used interchangeably, uh, collateral, character, um, conditions, um, you know, and, and, you know, I've seen a lot of different, you know, types of, of ways they've, they've kind of ran up all of these, you know, but it really comes into those 5, you know, cash flow capacity or capital, you know, cash flow capacity, capital, I kind of say are all interchangeable.

You've got conditions, collateral, and then character. And so as we evaluate all of that, there's obviously some matrixes within, you know, a little bit of each one of those kind of segments. And that's where we start to form our, what we call a risk rating model of the credit quality. And, you know, in the banking world, there's, you know, different classifications. You know, there's pass grades, there's watchlist grades, there's substandard grades, and then obviously nonaccrual, nonperforming, or, you know, some form of charge-off. And so, you know, as you go down the scale of getting to watchlist, substandard, special mention or charged off, you know, the— that credit quality worsens. And then, you know, the amount of reserve that the banks or the amount of capital that banks that have to set aside and allocate for those loans become greater as that happens.

You know, in a perfect world, we'd love to have, you know, all of our loans in a pass rating or higher. And so, you know, that's kind of how we evaluate and look at credit quality. And a couple specifics, if you're looking for a couple here, you know, focus on a couple real easy ones. And that's, you know, if you looked at cash flow or the ability to service your debt, you know, that's cash flow capacity. You know, we'd love a margin of, you know, what they call about a, you know, 1.25% margin of on your debt service coverage ratio. And really all that says is for every dollar in debt that you have on an annual position, we'd like to see you generate, you know, $1.25 in cash to be able to service that debt. So, you know, is that margin in that ratio is, is greater, that's obviously, you know, better credit quality.

Uh, the collateral side of it, I'm sure your audience and you guys, you know, everybody has heard, you know, loan to value, you know, that, that's really kind of what we're looking at, you know, leverage of the company on the balance sheet. What's the loan to value of our collateral? Obviously, the higher loan-to-value rates, that, you know, potentially that there's, you know, less credit quality. And I think the other one is capital. You know, and we talked about that. And that's, you know, obviously another balance sheet item. And you mentioned it, and it's— I'm glad you did. And that's the burn rate. You know, in the ag world, I think that, you know, we know it's cyclical, and you're going to have years where, you know, you make pretty decent return, and then you have other years where you don't. And really, what's that buffer in between there is your working capital..

And so if you've got some, you know, losses on a per acre per bushel, you know, what, how much working capital do you have? And what's your burn ratio on that? And, you know, the bank internally, I think, you know, if you've got 3 years of working capital in the current burn rates, I think we all think that's, you know, fairly reasonable. Above 5 years is pretty strong. And I think less than 2 years, you know, you're at a little lower credit quality. And then the final one that I always look at, and I think banks, you know, especially on the smaller community banks, is character. What's the character of the borrower? And, you know, I think a lot of us would say on the lending side, is it, you know, there's a lot of, you know, of all the 5 C's of credit, the 2 that, you know, probably mean the most are cash flow and character.

Those are the 2 that, you know, we look at and evaluate probably at the highest level. Collateral doesn't repay a loan, and capital, you know, your burn ratio helps you weather the storm between there. So those are— hopefully that answered that question, Chris, but those are kind of the benchmarks and the parameters that we look at when we start to decide credit quality.

Chris

Barron: It does, but it poses almost another question too, with respect to— okay, and I'm not dissing banks at all, but I get to work with lots of different banks, right? And a lot of cash flows, see a lot of, um, a lot of loan renewals. And what I see pretty commonly across the industry is there's not really any consistency with respect from one bank to the next. And so the banks do a great job— where they do a really good job of is consistency internally, right? And so you come up with your own system, and then that is the system that you use from which to manage your— and this is me from the outside as an observation, look at this— but as a way to manage your portfolio of borrowers as it relates to your capacity to loan and, and your own risk tolerance level of, okay, how much risk tolerance do we have? How much can we manage here? And then how does that fit with some of the banks?

I see your ag only, some of them I see are ag commercial, some are ag consumer. Yes, I don't know what the hell they are, but you know, it's just, it's so different. And so I think it's so important that each of our listeners actually have these conversations with their lender specifically and say, okay, to you, to, as, as my lender with your institution, how do you define credit quality? Just like we just had that conversation with you, because I think you know, with all due respect, you, you kind of, when you're talking to this many people, you kind of got to give a, you know, the, the generic, this is kind of what the industry is gonna, gonna tell us.

With all that said, this leads to a question of, and it's going to be just your perspective, so this isn't a recommendation, it's not what's absolutely going to happen, but I want your perspective on how much tolerance do you think will be out there? Because we see where other area we see variability is some banks will do a really good job of staying with somebody they probably shouldn't stay with. Yeah, but if they— back to the character piece, they'll ride along with somebody for a long damn time and, and try to make sure that they give them every last ditch effort to, to pull through. Conversely, I see some in the industry cut the strings pretty damn fast. I saw some strings get cut in 2019 without saying any names or anything of any, anyone, but I saw some strings get cut in 2019 that was a little frustrating to me.

With operations, the character was phenomenal, their data and their tracking and their information was phenomenal, and their debt-to-asset ratio was pretty good. Yeah, it came right down to what you said. The, the second thing you said that's very important is cash flow. You said character and cash flow would probably, probably, uh, work their way to the top as the two things. So my question, back to my question, is from a tolerance standpoint, as an industry goes, let's assume we have a couple of shitty years here, it gets kind of tough. How much tolerance do you think is going to be out there? Because is there, is there enough headwinds that the banks are dealing with that the tolerance level is going to be less maybe than it would have otherwise been?

Jeremy

Doetch: Yeah, so I'm going to try to cut this up in just a couple different ways, and hopefully I don't ramble on too long here, Chris. If I do, just tell me. Um, but I, I think there's a couple of things that you need to keep in mind in, in, in, in Really, I think you need to look at it to answer your question, is it what size bank you're with? Are you with a larger bank, you know, mid-sized bank or a small, you know, smaller local bank? I think the risk tolerances of those three different areas where you would be in slightly change. And I think it's, you know, somewhat because of just the amount of capital at the large banks that, you know, they probably have a quicker fuse on pulling strings than some of the, smaller banks, along with the smaller banks, obviously know the people at a better level, you know, they're more of a name and a relationship than they are a number.

And so I think that you've got some variance in that position. The other side of it where I think you'll see some variances is, is that bank really a true ag bank? Or are they a commercial consumer bank that is, you know, that dabbles in, you know, higher net worth individuals that want to farm, you know, and it's picked up a few others along the way. I think those are really two different kind of sectors, because if you're a true ag bank and you understand the cyclicality of this, I think that, you know, our risk tolerance for turning this around and understanding the economic headwinds and some of the challenges out there, we're going to understand better than the average bank. If it's an average bank that's covering a lot of stuff, you know, they tend to get skittish like the larger banks, you know, as you start to see some deterioration and just try to exit ag in general.

So my perspective is going to be a little bit more of the, you know, we're a midsize to smaller size community bank that over 50% of our portfolio of total loans is in agriculture. So we're pretty, pretty sound into the ag industry. And so I think that, you know, our tolerances are probably going to be a little less than what they were coming off the supercycle of 2012. You know, we had those years between like '13 and really 2019 that, you know, we kind of bumped along the road there at that, you know, it seemed like every year we were guaranteed somewhere around that $3.90 range, you know, on the crop insurance. So we were coming off that supercycle. Rates were low, you know, there wasn't the inflation there, there wasn't, you know, there was a lot of things that had happened that, that banks had already had healed. I think at this point in time, our cost of funds are still high.

You know, we've got inflationary pressure through wages, other things that are going on that, you know, I think we're going to be a little less tolerable with the, with the grower that doesn't have a good plan on how to get through this area that we're in. I think they're going to, we're going to have a lot less tolerance with the grower that has already got too high a debt-to-asset ratio that there's not a lot that can be done on moving some of that permanent working capital down the balance sheet. But I think that if you come in, you know, if you're struggling and you're transparent with your banker about, you know, what the areas you're struggling in, what you're doing to, to try to overcome those challenges.

And if you have a solid plan with some numbers that are pretty reasonable to understand and to get behind, I think you'll find a true ag bank is willing to go along for the ride with you. I think where we start to lose patience is, you know, where somebody doesn't maybe have a good handle as to why they're, you know, they're losing a bunch of money. They may not be willing to look at some of the equity position that they have in some of the longer-term debt to restructure, or they've already done too much of that and there's just not a lot of room to work with. And there's no mitigating factors on protecting the downside, or a plan to sell, you know, maybe inventory and crop that they have on hand.

So, you know, I guess long story short, to wrap that question up, is that I think if you're 100% transparent with the bank, and you've got a well-thought-out plan that assumes reasonable numbers from a yield and price perspective, I think you'll have luck being able to ride through this a couple of years. If you're outside of that, I think, I think you need to be prepared for the bank getting cold feet on certain areas of lending positions with you.

Chris

Barron: Mm-hmm. Okay. To tack on to that a little bit, as the banks review things, one of the areas that we see, we see this a little less now than we used to years ago, but the, the balance sheet, market value balance sheet. I'm going back to market value balance sheet. So, you know, when you guys do loan renewals, as you said, you know, the loan renewal criteria is probably going to increase. Yeah. In other words, you know, which gives me job security, obviously, because all of a sudden You know, it's like, okay, we got to have more details, we have more information. That's all well and good.

But, you know, one of the things that I wonder sometimes when I look at certain lending institutions too, is how much due diligence is being done on that market value balance sheet with respect to, you know, it's not uncommon for farm operations anymore to have, you know, $1 million, $3 million, $5 million, $10 million worth of equipment on there. Pretty damn easy to be off on a, on a $10 million line of equipment, or a $5 million line of equipment for that matter, to be off by $1.5 million on a market value balance sheet, which is a freaking big amount of money. Yes. And, and we see that because the banks sometimes take every year, they'll take 10% and depreciate the machinery line 10% every year, and then at some point they got to reconcile that because some of that stuff's didn't depreciate 10% a year, some of it did more. And so there's a reconciliation that has to occur.

What, what's your thought on, on market value balance sheets and what lenders need to do, or what do farmers need to do better to make sure that these market value balance sheets are accurate, to show that they're accurate and not be dicking around with land values when they're going up to make the balance sheet look better? Yeah.

Jeremy

Doetch: Yeah. So, I mean, heck, we could, you know, Chris, we could probably have a whole, you know, podcast on just that. Yeah. You know, but I think overall, you know, the bank's job is to evaluate risk. And so, you know, if you, if you start walking through, you know, the priority of the 5 C's, if we say cash flow is number 1, character is number 2, you know, obviously collateral And capital, you know, you could argue back and forth whether those should be 3 and 4. And then obviously conditions, you know, we need to know what the market conditions are. So as you start rolling down to where, let's say cash flow doesn't work very well, look very well at this point in time, you know, we're showing a $100,000 loss or, you know, potentially even more.

You start looking at, you know, the character and the, you know, capital position of the balance sheet and working capital, and that's short too, then we're going to start getting pretty— we're going to want to, you know, what I would say is we're going to want to check the validity of certain, you know, market valuations that you have on machinery. And whether you do that yourself, or we do it, you know, that can be kind of a conversation back and forth. I would say that if the farmer does it, and brings that information in, it obviously builds character. It builds, you know, value to what, you know, that the numbers have been well thought out.

And some of the, you know, some of the things that we, we do is, you know, there's some publications that we subscribe to that, you know, will give us the, you know, average, you know, selling price of a tractor with, you know, X amount of hours and things of that sort. You know, there's some, um, there's some services out there that provide some of those valuations. So I guess if, you know, if you're listing a you know, a new 8RX, you know, out there, um, and it's significantly higher than what, you know, the average, um, sale price of those are right now, you know, we're probably going to scrutinize that.

And I think you need to be prepared for it if you're in that general range and you've got access to that to say, look, you know, I can, I can value what I can value my equipment wherever I want, but I'm going to do it based off of, you know, current auction sales or some of these publications that print this stuff out, and you bring some of that supporting data, you're probably going to get a lot less scrutiny within the market-based approach.

That would be kind of what I would say, you know, where I think sometimes it comes in tough, and this is the challenge, is that, you know, if you've got an operation that's been heavy in, you know, purchasing, and some of that purchasing has been their tax planning tools and we've accelerated that depreciation, you know, sometimes, you know, if you, if you get the book numbers and you're showing very little in, you know, on the balance sheet of the book, but then your, you know, your Ag Balance Sheet that you fill out to me or the market value has got a drastic difference between those two, then we just probably need to have a conversation of, you know, understanding your, your method of depreciation to make sure that reconciles so that there isn't anything funny that's going on to that.

But Like you said, you know, I think there's a lot of banks that look at all of that a little bit differently. We don't, we don't like to take any kind of, you know, reduction of the equipment value. What we're really doing is asking our borrowers to, to give us a, you know, an idea of what they think their machinery is worth. If they have supporting data to that, you know, we'll take that and adjust our loan-to-value rates, you know, accordingly. If they don't provide that, we'll probably do some homework on that. And if those are off, we'll probably adjust our loan-to-value rates or internally we call advance rates. It's your loan-to-value calculation kind of in reverse. So, you know, I don't have a good answer for you, you know, how to uniform that throughout the banking industry because it's just like you said, our credit cultures are sometimes very different.

But I would urge a producer to have some candid conversations with the banker of how do you really evaluate my stuff? What do you look at? What makes What are things that you like that I do and provide to you? And what do you wish that you could get from me that I'm not giving to you already? And I think you'd be surprised at some of those conversations. I have some of those with, you know, some of our customers and what's, you know, it's really done a nice job to form that relationship and continue to build character, which, you know, I kind of place at number 2 of the 5 C's of credit. So I don't know. I don't know if that answers that, Chris, or not.

Chris

Barron: Yeah, I mean, it does. I think a couple of things that's really important is to make sure that, um, we do what you just said, is that we ask for some constructive criticism. Because I feel like I do a really damn good job, but I want to ask my lender every year, what do you need me to do different? You know, just because I think I'm doing good doesn't mean I am, because it's, it's my perspective, not their perspective. And and they're the ones loaning us money. And so I think that's, that's really good.

The other thing I would say too with regard to the equipment, and there's a lot of people listen to this are going to know what I'm going to say here real quick, so I'll say it fast, is that I still am a firm believer of doing an appraisal every single year of your fleet and going to two different equipment dealers that are local and getting two different valuations on every piece of equipment that is in your equipment fleet, averaging those numbers and applying those numbers on a dual column report so that you know what your depreciation was, or appreciation sometimes. Um, but you know, what's the change in value on the whole fleet of equipment, and then accordingly put that on the balance sheet based on those numbers. And then that way it's a consistent way, a consistent approach, and then the lender's going to do whatever they want with it, you know.

But Yeah, but at least it's consistent. I still think it's consistency that's really the key on balance sheets because so often I hear from lenders occasionally— I guess I shouldn't say often, but occasionally I hear from lenders like, oh, this is an interesting balance sheet, you know, because it's, you know, it's creative anyway. And so I think we got to be careful with that. One thing I was going to say, too, you know, I think we're all going to be going into as it looks right now anyway, as we record this in March of 2024, and people maybe listen to this in 2 years and maybe there's lessons that, you know, things that they'll be listening to this and be like, well, I wish I could tell you this, you know, from, from 2026. But I think we're all going to need to be in what I call survival mode.

This is the 4th turn that I've seen from really productive and profitable time frames, you know, 2 to 5 year windows we get sometimes of really good profits. And then there's that transition that really hurts. It's that first year or two because it takes about 3 years for land rents to come down. It takes a while for all that stuff to come down. I watched a really interesting— I just want to throw this out there— a really interesting documentary on Delta Airlines. And what they did during COVID I don't know if you've seen that or not. If you get a chance, look it up. I don't know where you access it. I was actually on an airplane, on a Delta airplane, believe it or not, and watched the, you know, the, the video. But it was about how they survived, you know, going from the all the airplanes being full to only having, you know, 2 or 3 people on an aircraft. And what the hell do you do?

You know, all of a sudden all your freaking revenue just went away. And they don't have, they don't have like flight insurance like we have crop insurance, you know, they, and so some of the things they did, while they're not exactly applicable to us as farmers, I would just recommend the listeners, if you get a chance to go listen or go watch that video, look it up somewhere, Google it or find it somewhere. But it's a Delta Airlines documentary of how they dealt with COVID And it was interesting because, I mean, they, they parked um, almost 80% of their airplanes in the desert during— for about 18 months and went down to like 20% of the fleet. And then that 20% of the fleet was— most of the airplanes were about empty, but they, they do haul a lot of stuff under, under the airplanes.

And, um, I think there— it sounds like there's not a direct correlation here, but I still think there is in that what can we do to be creative to survive if it's a 2-year deal or if it's a 4-year deal or 5-year deal, you know, because you talk about burn rate and all that kind of stuff. But, you know, there are ways to, to generate more income, but you can't save yourself to prosperity. You can only save so much. That's the thing. I think we have to— when we watch the, the cash flow and the budgets, how do we, you know, how do we make more money sometimes too? Because you can save to an extent, But you get to a point where like we can't really save anymore.

And I just want to make those comments and then just see as we wrap up if there's anything I haven't asked or anything based on those comments or things that you're thinking that you'd like to leave producers with as we head into the spring planting timeframe. And just, you know, from a lender's perspective, what do we need to keep an eye on?

Jeremy

Doetch: Yeah, I think those are, those are great thoughts, Chris. And, you know, I guess the only thing I would follow up with with all of that. I think you've, you've hit a lot of it on the head. You know, and I think you've, you and I've talked about this a little offline, or maybe last week. And, you know, the one, the difference I think that we have in this downturn that we haven't seen in the two previous, and I'm kind of going to summarize the two previous of coming off maybe a little bit of the ethanol boom, you know, in the late 2010 decade. And then again, you know, coming off the supercycle of the 2012. And, you know, as that kind of carried over a little bit into 2013. You know, the difference we have this, this time around is obviously we've got inflation that's still out there. And I, you know, we could talk about that.

It's only— I think the, the inflation rate today, it says it's at 3.4%, but if you factor in, you know, some of the energy costs and some of the other things, I mean, we, we know there's, you know, wages, you know, there's, there's inflation that's buried into, you know, other sectors. I think, I think the average person would say that feels a lot higher than that. Yeah, I think that's dictating, you know, some of our costs. And then the other one is, you know, where interest rates have gone, you know, and so, you know, where— what I would say is that I think our margin of error is thinner than it has been in the last few downturns. And I think our response to how we're going to get profitable, or how we're going to mitigate this downside has to be a lot quicker than what it was in the last two down cycles.

I don't know what you're seeing, but I have seen some of the fastest erosion to working capital in the latter half of 2023, in the first quarter of 2024, than I did in probably the 3 years coming off the supercycle. And I have been trying to figure out what, you know, what can I put my head around on that? And a lot of it, I think, is this inflation and interest rate game that's going on.. And, you know, a lot of the times you could hold the corn and you could, you could play the carry in the market. And, you know, it didn't kill you on a, you know, on what it costs you to, you know, to carry that from an interest cost or what, what, what cash premium is. And that's a lot tighter. And so, you know, if you start looking at, you know, 8 to 10 cents, you know, of interest cost along with, you know, the premium on cash, you know, I was just kind of looking at the market this morning.

You know, we're showing a 14-cent carry, you know, this is on the board, this is not, you know, Cash Elevator bids. But, you know, we're showing about a 14-cent carry from March to May, you know, and about 11-cent carry right now from May to June, you know, and if you're, if your borrowing costs are, you know, 8 to 10 cents, I mean, those just 2 months in that you could, you could whittle away at that carry depending on how and where basis moves. So, you know, we're in some real timeframe right now where the decisions need to be quick, the decisions need to be well thought out, and you need to react quick because it's— working capital is really eroding faster than I have ever seen in my lending career.

So I guess I would just reiterate what you said by being responsive, being well thought out, know the numbers, and be ready to make some of those changes quicker than than you have in the past.

Chris

Barron: Mm-hmm. Yeah, I'd expand on that. I mean, that just created another thing I would comment on or tack on to what you just said as an observation. I would concur 100%. This is the fastest burn rate we have seen with the majority of people we work with as far as, you know, and there's still a lot of cash out there yet, though, too. So there's a lot of people still pretty healthy. But if you look at where they were a year ago versus where they're at now, yep, on average. So it's not for— not in the case for everybody, but there's 3 factors that we've observed. And I call— I'm going to call it the 3 I's because I just wrote it down. I'm like, oh, there's 3 I's there. Yeah, it's inflation. And I wrote down inflation rates across all categories. And so there's no category that wasn't impacted.

In all of our categories in Profit Manager that wasn't impacted by inflation either directly or indirectly. And one of the big ones is the RTM, which we call Return to Management category, which is overhead expenses. And those were a combination of pure inflation. And when we make more money, what do we do?

Jeremy

Doetch: Spend it.

Chris

Barron: We spend more. And so, and that's still going on. And those become sticky numbers because you're paying payroll, you're paying employees, you're paying yourself, you're, you know, and you got healthcare costs and all this other shit that's in there that's a big chunk of money. So that's one I, the first I. The second I is inventory grain carryover. Yeah. Um, the reduction in dollars and cents, I— it's just freaking astronomical. I can't even— I couldn't, you know, I do math a lot. I don't think I can do math numbers that big.

Jeremy

Doetch: Yeah.

Chris

Barron: What was what was reduced in that commodity change that we saw in those inventory levels are crazy. And, and a lot of our clients sold pretty good. I mean, we're— I mean, most of our clients were in that 60 to 70% sold on corn and 90 to 95% sold on soybeans. I can't imagine maybe the, like, the average growers, because I feel like we have We're pretty fortunate to get to work with more executive-minded producers and they're heavier sold, especially the ones that were on Profit Manager that I can look at. And then the last I is investment in capital items, whether land, machinery, accidentally bought a boat. You know, there's stuff that got bought for the business or not the business that took away some of the liquidity. And it was okay and it cash flowed when we had $5.50 corn or $5.25 corn.

But when you have $4.25 corn, it does not cash flow because those principal and interest payments are still there. And it's weird, you guys always want frickin' paid back too. I mean, you give us money, but then you want it, you want it back.

Jeremy

Doetch: Yeah, it's a weird system, isn't it?

Chris

Barron: Yeah, really weird how that works. So those are, you know, kind of the three-eyed monster, I guess. I'll say from our perspective, unless you see something else other than that. But when you comment that, I just— I could wrote that down. I think that's going to be my new phrase is the three-eyed monster that's out there right now.

Jeremy

Doetch: So, yeah. And like you said, you know, I, you know, like we've both kind of been sitting here talking about the last 10 minutes. I think if you know all of your input costs or how that affects your business and your the faster you can move to protect some of that from affecting your, your, your farm balance sheet and income statement, I think that's the better off you're going to be. I think this is, this is going to be a deeper, faster cut than we've seen in the past. So I'm hoping it's only, you know, a couple of years, then we're back into it. But I, the trend we're in right now, it's, it's been a faster decline than I've seen since I've been in ag.

Chris

Barron: Well, I think it's just pay attention to details. I just did a podcast that's going to be on 19 Minutes recorded right before we started recording this on agronomic economics. And with the guest I had on there, you know, he's, he's an agronomist and he's like, we're going to maximize yield, we're going to max yield, max yield, and everybody's going to max yield and going into 2024. What's that going to do to commodity prices? You know, hopefully we all do. But, but, you know, it's— things kind of balance out in the end for sure. So any last comment? Give you the last word.

Jeremy

Doetch: I don't think so. I mean, I, I think on my perspective, I've hit, you know, some of the things that, you know, we think about on the banking side. Hopefully it gives you and your audience a little bit, you know, to think about as you go through, you know, this growing season. I guess, you know, the other thing I would say is that obviously You know, one more caveat to this, Chris, and maybe it's a good final parting of this segment here. And that's, you know, obviously, we can't predict the future, whether we're, you know, bankers, whether we're farmers, you know, consultants, we can, you know, do the best we can with the information at that time.

And sometimes during growing seasons, that changes, you know, like you could get halfway through the growing season, you got the crop in the ground, you know, you see final plant numbers, we may have rallies or continued deterioration, and that plan needs to change. And so I would say, you know, what you set up in January, you know, needs to be revisited, you know, a couple times of the year. And if it's drastically different, as you're, you know, if you've revisited from what you've presented to your lending institution in January, it's probably worth, you know, having a meeting and say, this is what's different, this is why, and these are the things I'm doing to, you know, to change as, as the, the growing cycles change too. So I think, I think that's a final thought to how to work well with your lender.

Chris

Barron: Now, it's great, great comments. And Jeremy, this has been a great conversation. I think we've covered a lot of, a lot of ground. I think maybe, you know, we get into that late summer timeframe, maybe we reconvene and do an additional update on, on sort of the state of the ag economy, kind of what's going on in lending, because there'll be a lot of changes. It seems like they Things change pretty fast anymore in this world that we're in today. And, and, uh, so we'll, we'll definitely do that. And again, I just kind of want to remind everybody, um, this is a— this is an example of the type of information that we do have on 19 Minutes. And so if you get a chance, I'll make sure again that Mac has the link to 19 Minutes to get that signed up. This one we wanted to have on, on the Ag View Pitch. We did one with Jeremy what, a few months ago on 19 Minutes, um, going into 2023.

Some awesome stuff in there that Jeremy and I talked about. But go ahead, check that 19 Minutes out. There's 43 episodes in there, $30 a month. They come out the 9th, the 19th, and the 29th. With that said, appreciate everybody. Really, be safe out there this spring. Good luck, hang on to your money. And with that said, uh, thanks everybody, and we'll catch you again next time. On the Ag View Pitch.