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The 2011 outlook is mixed, ranging from very good for grain operations to building concerns for the protein sector, especially as we look into the second half of 2011 and first half of 2012.


Source: GreenStone FCS Dollars and Sense Column in Michigan Farm News

GreenStone's Ag Economic and Credit Outlook

The saying goes "volatility equals opportunity". The events of the past four years, and more recently the past six months, has only driven home the point agriculture will likely be operating in an environment of increased earnings volatility going forward. This year presents a significant number of opportunities for those who have positioned themselves to seize the moment. Potential outcomes, good and bad, will continue to vary significantly by individuals within the various industries. Our challenge at GreenStone, along with our members, is how we adjust to ensure we continue to meet our vision and mission of being the first choice for Michigan agriculture to continue providing our members with a sound and reliable source of credit. A fellow Farm Credit shared with us their philosophy statement on lending that I believe summarizes our mission statement slightly different but with the same focus…We will be cautious in good times and courageous in challenging times.Entering 2011, we find ourselves financing both sides of this equation.

In general, 2010 was a very good year for agriculture. Industry resources are projecting that net farm income will increase from $62B/2009 to $85B for FY2010. From a longer range perspective, this would be $15B above the last 10-year average. Because of the diversity of Michigan agriculture (strength) it will be a rare occurrence when all industries are having positive or challenging years at the same time, and 2010 was no different. The grain, sugar beet and potato industries had a very good year. The protein sector, including hogs, turkey, dairy and poultry did well until the fourth quarter when increasing grain prices started to erode margins. Early season frost on the west side of Michigan hurt earnings in the fruit industry. The general economy in the Midwest continues to impact the greenhouse and nursery industries.

The 2011 outlook is mixed, ranging from very good for grain operations to building concerns for the protein sector, especially as we look into the second half of 2011 and first half of 2012. Agriculture continues to increase its reliance on exports. For 2011, export demand for agricultural commodities is forecast to continue at or above 2010 levels in which exports ran at an estimated $107.5B, the second highest level on record. Domestic demand is likely to improve in 2011 as the economy continues to slowly improve (2-3% GDP growth) but at a rate that is lagging many economies in the rest of the world. Export levels remain vulnerable to economic conditions and geopolitical events that impact our trading partners such as Mexico, Russia and China. With the rise in grain prices and improving economic conditions around the world, oil prices and other inputs have started to see pricing pressure. While weather is always a variable for agriculture, it has the potential to have a magnified effect on 2011 - 2012 operational outcomes.

So how will the current environment have an effect on the availability of credit for 2011 and beyond? It depends…it depends on how you have positioned your business financially, how volatile you earnings stream is, and what steps you have taken to minimize earning volatility to ensure projected cash flows will be realized. We remind our lending staff we are in the business of evaluating and managing risk. We are not in the risk avoidance business, nor are we in the venture capital risk business. Our goal is a long term, healthy financial partnership.

Our core underwriting standards (maximums) have not changed. However, the level of earnings volatility of the past three years has resulted in us approving fewer loans with exceptions to our core underwriting standards. We continue to differentiate between operations in the same industry based on our assessment of risk. What has changed is we are taking more time to look inside the numbers of an earnings statement, balance sheet and business model to assess the appropriate debt capital structure, with added focus on work capital and residual borrowing capacity. Most of this is not new, but basic fundamentals remain in evaluating how you are managing your business risks. Some of the key elements we evaluate in assessing the business risk profile are: (1) Industry conditions; (2) Are you open market on your commodity sales or do you take positions via contracts/hedging to minimize price volatility; (3) Locking in input costs and/or hedging at the same time you are taking positions on your commodity sales to ensure gross margins are protected; (4) Revenue protection of margins with insurance products available for crops/dairy/swine; (5) Depth of the management team; (6) Quality of financial records and how they are utilized by management to operate the business; (7) Execution of the business plan; (8) Forecasting quality and is there discipline staying on plan (predictability).

So as we enter 2011, GreenStone remains cautious for those experiencing good times as this too shall change and continue to be courageous, fundamentally sound partners working with those individuals experiencing challenges. Our commitment remains constant.