Low Rates Spell Opportunity and Risk
Blanchfield is not surprised at what he is seeing in agriculture. "Land prices have skyrocketed in certain areas, and this along with high commodity prices has contributed to an agricultural 'wealth effect,'" he said. "Farmers and ranchers feel wealthier, so they are spending to update and expand plant and equipment, and they are looking for more ways to expand their wealth. I have had 80-year old farmers tell me that farming is fun like it has never been before."
Blanchfield admitted that agriculture is in a period of unmatched prosperity, and people are opening their wallets like never before. Suppliers are reporting record sales, and machinery and equipment suppliers are having a hard time keeping inventory in stock. These good times may be the only time in many farmers' lives where they have had the income to do things. However, Blanchfield worries about a downside where people get too used to the “good life” and have a hard time adjusting to the inevitable downturn.
"People forget that liquidity is a good thing, and it is the only thing that will cushion them from a setback, like falling commodity prices," said Blanchfield. "The next decade will be interesting to watch. Is this a peak or a plateau? Will this time be different from all the other farm booms of the past?"
IMPACT ON RETAILERS
What does this mean for full service agricultural retailers? Record low interest rates have made it easy for borrowers with low risk to find competitive rates. Although the Federal Reserve has signaled it intends to keep interest rates low, how long that will last is anybody's guess.
"I know bankers who are currently looking at customer cash flows and simulating a 4 percent to 5 percent rate increase to see if their customers have robust enough cash flow to continue making payments," said Blanchfield. "We all know that rates will go up, but none of us know when it will happen."
Mellencamp pointed out that the customers most likely to look for credit from their retailers are those with the highest risk. "Credit collections may have been good the past few years, but they should have been because crop prices were high and farm income has been strong," he said. "If crop prices fall and farm incomes decline, credit collection could become much more difficult, and agricultural retailers may end up absorbing bad debt write-offs. Best to let the lending professionals provide the credit and take this risk and stick to the business of selling farm supplies."
Blanchfield reinforced that thought, noting that most retailer-extended credit is unsecured credit. The deck is stacked against unsecured lenders if there is a financial problem. "This is an area where a farm supplier/retailer and a banker should work together," he said. "Visit with your banker about a line for indirect credit—meaning the credit is underwritten and funded by the bank, but to the customer, it appears the credit is coming from the retailer."