Farmers urged to take advantage of historically low interest rates, rebound in soybean prices
December 15, 2020 | Aaron Putze, APR
Every adjective to describe 2020 has been used. And used again. And again. Little wonder. The year has been unlike any other.
Continued diplomatic unrest with key export markets, relentless attacks on the Renewable Fuel Standard, massive South American soybean production, and price and supply gyrations caused by the pandemic have frayed both nerves and commodity markets.
Then, Mother Nature grabbed the headlines in August when the most destructive and expensive complex of thunderstorms struck the U.S. Without warning, a derecho cut a swath of devastation across one-third of Iowa, shredding and flattening millions of acres of soybeans and corn and destroying millions of bushels of grain storage. Moderate to severe drought also took its toll and multiple October snowfalls added a not-so-welcomed wintery flare to fall harvest.
Indeed, 2020 gave even the most battle-tested farmers all they could handle, says Jim Knuth, Sr. VP of Farm Credit Services of America.
“It’s a difficult agricultural year to describe because there’s not another one to compare it to,” he says.
Soybean sales opportunities for farmers were scarce as prices were dogged throughout most of the year by lackluster demand and strong global supplies. Forty percent of farm income, Knuth says, came courtesy of the federal government – a direct result of trade tensions with China and a looming presidential election.
As combines rolled, lower ending stocks and better supply-side forecasts for grains and oilseeds emerged. A rally in soybean prices combined with federal disaster aid will help keep most farmers whole as they close the books on 2020.
“We’ve had a disaster year with weather, but not necessarily financially,” says Knuth. “That said, without government support, it would have been an entirely different story for a lot of farmers.”
But all bets are off for 2021.
“With no election and trade conflicts moderating, it’s reasonable to assume the federal government won’t replicate the financial support next year,” Knuth says.
Therefore, farmers must be disciplined marketers, capitalizing on price rallies and taking profit opportunities when they arise.
He also advises making the most of record low interest rates by restructuring or refinancing real estate debt – or both.
"Farmers are realizing the power of amortization,” says Knuth.
The length of a loan, he says, makes a big difference, even more than the interest rate. When done in combination, however, farmers can lower the fixed costs of their fixed assets, retain more working capital and better adjust to low-margin scenarios.
“You can’t run a business without cash flow,” says Knuth. “Revising the terms of loans can help.”
He expects the low-interest rate environment to remain another 2-3 years. Election outcomes, Knuth says, rarely impact the fed’s approach to interest rates.
However, without the financial equalizer of government support in 2021, farmers need to scrutinize their costs of production and drive them as low as possible.
“Reliance on government payments can’t be part of next year’s business plan,” Knuth says. “This means projected cash flows and business plans need to stand on their own.”
Land values and cash rents are expected to remain strong. Farmland continues to be a sought-after asset to own as its return on investment beats interest rates, which are historically low.”
“We expect the trend of strong interest in owning farm ground will continue,” Knuth adds. “There’s a lot of capital in Iowa. Willing and able buyers are not hard to find.”
With harvest completed, Knuth encourages farmers to act proactively on restructuring loans, debt and amortization.
“Farmers have a window to do something,” he says. “It’s wise not to let this historic opportunity pass you by just because you may add a few years to a loan and think it will cost you money. This is not the time to be penny-wise and pound foolish.”
He also encourages farmers to consider how they will use the current grain commodity pricing opportunities to their advantage.
“We can sell old crop grain and new crop grain at profitable levels. What a way to end 2020.”
This story was originally published in the December 2020 issue of the Iowa Soybean Review.
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