After several years of gradual progress in the wake of the Great Recession, many business owners—and their employees—are finally feeling optimistic again.
But outside of the heart of the Twin Cities metro area, it’s a different story for many in Minnesota’s rural economy, where agriculture is a dominant force. Most crop farmers, for example, saw good years during the larger economic downturn, due in part to expanding export markets. But today, with a drop in commodity prices, those same crop farmers are facing a challenging financial outlook in the short term.
Rural lenders are on the front lines.
Mankato-based AgStar Financial Services, with approximately $7 billion in assets, lends almost exclusively to agriculture customers. For lenders dealing with farmers, depressed commodity prices are on the front burner.
“Probably the biggest thing right now is in the corn and soybean group. Prices have dropped very dramatically compared to what they were a few years ago,” says Mark Greenwood, senior vice president at AgStar.
Greenwood notes that in 2013, a bushel of corn sold for more than $6. But in 2014, prices started to spiral downward. As of mid-May, Greenwood says, the price for corn was sitting at roughly $3.40 per bushel.
That lost money adds up. Greenwood says that an acre of land yields approximately 150 bushels of corn. For a farmer with 500 acres, a price drop of $2.60 per bushel translates into a loss of $195,000 in revenue.
A May 2015 survey from US Bank found small business owners in Minnesota to be slightly more optimistic than business owners in other parts of the country. At the same time, the survey showed local business operators to be more cautious about expansion plans.
The US Bank survey indicated that 72 percent of small business owners in Minnesota think that the national economy is in an expansion or a recovery, which compares with 67 percent of business owners across the country. The study also found that 49 percent of Minnesota small business owners believe that the state’s economy is in better shape than the overall national economy is.
Yet Minnesota business owners are still cautious. Only 20 percent of Minnesota business owners say that they are likely to add employees in the next year, compared with 25 percent of business owners nationally who are looking to add staff.
US Bank’s survey also found that 29 percent of Minnesota small business owners plan to make a new capital expenditure in the coming year, compared with 34 percent of business owners nationally who are planning new investments.
The 2015 US Bank Small Business Annual Survey polled 3,202 small businesses during the first quarter of the year in the 25 states where US Bank provides small business banking. US Bank surveyed companies with $10 million or less in annual revenue, including 200 companies in Minnesota.
St. Paul-based AgriBank is one of the largest banks in the national Farm Credit System, with a 15-state territory and $94.4 billion in total assets. In recent years, AgriBank’s loan volume has been growing. For 2014, the bank’s loan volume was $77.5 billion, an increase of 5.3 percent compared with 2013.
The bank’s loan volume is up a robust 30 percent since 2010, when it stood at $59.5 billion. The growth is being driven by increases in the amount of loans made to its affiliated associations, which are lending more to farmers, ranchers and other customers.
For 2014, AgriBank reported net income of $569.6 million, an increase of 1.1 percent compared with 2013. But it’s slightly lower than the net income of $580.9 million that AgriBank reported in 2010.
“That’s substantial,” notes Greenwood. “I think everybody’s wondering: ‘Is this the new norm?’ ”
Greenwood says that approximately 35 percent of AgStar’s total portfolio is with grain farmers who are feeling the pinch of lower prices for their products.
Greenwood grew up on a farm in southern Minnesota and has deep experience in the industry: 17 years as a feed salesman and 18 years in agricultural lending. He’s seen past downturns and says that he and his colleagues are talking with farmers about how to weather the storm.
“Usually it seems like a three-year cycle,” says Greenwood. “If grain prices are going to stay at this level, what are the things you need to do? Overall loan volume is probably actually up.” He adds that “on the grain side we’re doing some rebalancing.”
Greenwood says that AgStar is seeing more customers tap into their credit lines this year, as margins get tighter. At the same time, he notes that despite the current climate, many crop farmers are in solid shape, thanks to some good years prior to the decline in crop prices.
“If we look at our overall equity on a lot of our balance sheets, producers still have a lot of equity,” he says. “I think they’re probably more cautious on their spending.”
But, he says, “you’re not going to be buying a new piece of machinery this year. That does have a little bit of a ripple effect.”
St. Paul-based AgriBank is one of the largest banks in the national Farm Credit System, established by Congress in 1916. AgriBank’s 15-state territory covers about half of all of the cropland in the United States. Agri-Bank does not lend directly to farmers, but makes its loans to farm credit associations such as AgStar, which, in turn, lend to customers.
Jeff Swanhorst, chief credit officer for AgriBank, says that commodity prices are the dominant issue in today’s rural economy.
“It’s affecting everybody, but it’s really quite a small minority of farmers that are needing to have changes made in their payment structure,” says Swanhorst.
While the larger economy was in tough shape from 2008 to 2011, Swanhorst recalls that farmers did just fine during that period.
“Agriculture in general was doing very well,” reflects Swanhorst. “We had quite significant growth in some export markets during that period.”
But now things have changed sharply. A report from the World Bank in fall 2014 noted that commodity prices were expected to “remain weak” for most of 2015.
“All of the forecasts that we see [indicate] commodity prices are not expected to rebound dramatically,” Swanhorst notes, leaving most farmers in what he describes as “a very tight margin situation.”
The bottom line for many crop farmers? Tightening their belts—cutting costs in hopes of boosting margins. For farmers, that might mean tapping their credit lines, spreading out payments on loans or trying to negotiate lower rents with landlords.
“Most producers are doing various kinds of things to reduce their cost structure,” says Swanhorst. “It isn’t something that you do in one year.”
While the climate is challenging for crop farmers, Swanhorst adds that livestock farmers are still doing comparatively well.
“In general 2014 was a very positive year for livestock producers and dairy farmers,” says Swanhorst.
At the same time, real estate values for agricultural land are tempering after several years of gains.
“I would describe the ag real estate market as kind of choppy. That trend of increasing land values over the last 10 years does appear to be over,” says Swanhorst. “Those farmers that rent a lot of their land are probably going to have the most stress.”
Brad Costello, agriculture relationship manager for Grand Forks, N.D.-based Alerus Financial, is seeing similar trends. Although his office is in Grand Forks, a chunk of Costello’s customers are in western Minnesota.
“For the most part we’re coming off a lot of good years,” says Costello. “If the [commodity] prices remain low, I still feel comfortable for the most part that we can deal with that.”
Some farm customers are adjusting loan terms in response to market conditions.
“We’ve done some restructures. I expect that credit lines will be used a little bit more this year,” says Costello.
He adds that small business operators are faring better than crop farmers in the current economy.
“The small businesses that we deal with are actually doing quite well,” says Costello. “Equipment dealerships are feeling a little bit of the pinch—not as much equipment is being purchased. Things have slowed down, but that was to be expected at some point.”
As the fifth-largest commercial bank in the nation, Minneapolis-based U.S. Bancorp is a big player nationally. But US Bank also has a presence in smaller markets.
Corey Mensink serves as market president for US Bank in Owatonna and a commercial team lead for southern Minnesota. He works with both small business and agricultural customers. On the small business side, Mensink says that he is seeing some fresh optimism from business owners who are starting to weigh investments or expansions in their businesses, and is also talking to others who are now considering starting up new businesses.
“From a small business perspective,” he says, “there’s a general sense that the economy has turned some pretty critical corners.” Mensink notes that there’s “a lot of cash that’s been sitting on the sidelines.”
He’s seeing the loan volume holding steady compared with last year, but he says he’s encouraged by the tenor of discussions that he’s having with business owners.
“We’re having a lot of conversations about the future,” notes Mensink. “A lot of existing businesses are now taking those forward looks. They’re feeling a lot more positive and optimistic than they did a couple of years ago. Although the [loan] volumes may not have changed, the conversations have become more strategic.”
At the same time, Mensink says that some issues are the same for business owners whether they’re in the middle of the metro or sitting in a smaller community. He notes that many employers have concerns about finding workers who have the specific skill sets that they need.
“It’s a challenge right now to find the right people,” says Mensink. “I think businesses in outstate Minnesota face many of the same challenges as businesses in a metro market.” But in the rural economy, the current state of crop prices casts a long shadow.
“Low commodity prices are what’s driving a lot of the stress right now,” says Mensink. “We’re having to have a proactive conversation with every one of our farm customers to get through this period of low commodity prices.”
Burl Gilyard is a senior writer at Twin Cities Business.