Bankers gather in Colorado to speculate on future of ag economy

Northwestern Financial Review, Nov 20, 1999 by Bengtson, Tom

More than 700 bankers and numerous experts gathered in Colorado Springs, Colo., Oct. 31 to Nov. 3 to assess the current agricultural economy and make a few predictions about its future. While everyone participating in the American Bankers Associations annual Agricultural Bankers Conference seemed to agree that big changes are in store, the pace and magnitude of the change fueled much unresolved debate.

"Can small and mid-sized farmers survive without government subsidy?" asked Michael Moskow, the president of the Chicago Federal Reserve Bank. Noting that the number of farms in the United States has declined to 2 million from 6.5 million in 1935, and that 45 percent of farm net income in 1999 is coming from government payments, Moskow wondered aloud how many farmers would survive. And he wondered to what degree the American people would be willing to sacrifice for their survival. "Do we want to subsidize the smaller farmer to maintain a lifestyle that may no longer be economically viable?" he asked. Only the largest farms can afford the technology needed to allow them to be the low-cost producer, the only kind of commodities producer that can survive, Moskow said. Mid-size farms, he said, "face a difficult choice - scale back operations and follow the path of the smaller farms, or expand into larger operations." He brought the message home to his audience of agricultural bankers when he summarized: "the challenges of consolidation will affect rural communities as well as ag banks."

Randy Allen, the Texas-based ag consultant, emphasized the same point. He said too many farmers fail to manage their operations. The result will be a reduced number of farms and many small towns will dry up. Allen said many farmers do a good job producing a crop and monitoring markets, but they do a poor job marketing and, therefore, end up realizing little return for their investment and effort. "Good intentions and luck are not ingredients to success," he said. "They are a recipe for financial chaos."

Allen said too many farmers rely on government assistance to make it to next year. "I got a 15-month-old grandson who doesn't whine as much as many American farmers," he commented. "For 60 years, the politicians have been saying to the American farmer that if you cry a little too loud we will get you the money to get through next year."

While Moskow wondered how long taxpayers would be willing to bail out farmers, David Kohl said as long as "we have a strong economy, we will have farm subsidies." Kohl, who has made presentations at 22 consecutive ABA ag bankers' conferences, is a professor of agriculture and economics from Virginia Tech University. Kohl said the biggest threat to government subsidies is a weak economy.

"Interest rates are important to farmers," verified Kohl, predicting a 50 to 75 basis point increase in interest rates by the Federal Reserve in the near future. Other factors which could affect the economy include: appointment of a Federal Reserve Board chairman next June (Will Alan Greenspan, 73, be re-appointed?); performance of the stock market; rising oil prices, which would mean trouble for Japan and the entire Asian economy; and U.S. consumer debt levels, which are largely masked by home equity lines of credit. Moskow said one of his chief concerns about maintaining the strong economy is finding enough people to do all the work. "If businesses can't find enough workers to provide the goods and services that customers increasing want, we could see upward pressure on prices."

Nonetheless, many farmers have a bright future, Kohl concluded. The way farmers choose to work, however, is changing. "Many more farmers are going to work on a contract basis," he said. These farmers will make less money than they could today, but they will get a steady paycheck, which is appealing to many farmers. The contract approach also lets the farmers avoid the marketing aspect of the business, which so many farmers seem to disdain. Many large packagers and other firms already are entering into contracts with farmers. Increasingly, Kohl predicted they will target farmers who are receiving large government subsidies. As the potential for those subsidies diminishes, those farmers will need the contract arrangement to stay in business.

Jerry Renk, director of banking relations for RSM/McGladrey of Minneapolis, suggested during a panel discussion, that "bankers should consider offering contracts to farmers." And Donald Anderson, president and CEO of Norwest Ag Credit in Sioux Falls, S.D., suggested in the same discussion that bankers should get together to form a venture capital vehicle that would help farmers stay in business.

Kohl encouraged bankers by declaring "there will be a role for community banks." He noted that the world market demands that participants "move on a dime and the big banks can't do that."

Renk agreed. "Community bankers have never had more opportunity," said Renk, a former community banker. "We can turn on a dime; we can respond quickly."