AgViews Q1 2024

AGVIEWS

— BY LYNN PAULSON

Bell Bank Director of Agribusiness Development

Farm Economy Outlook: What To Expect for the Rest of 2024

This is the time of year when we, as ag lenders, meet with our ag producers to review and analyze 2023 financial performance and look at 2024 budgets and projections.

For many farmers, 2023 was a challenging year marked by softening commodity prices and other strong headwinds. Looking ahead to the rest of 2024, we discuss whether those challenges will persist for the farm economy, and highlight trends and events that could influence agriculture in the months to come.

Make no mistake, after a well-deserved stretch of several profitable years, most producers are in really good financial shape and have built up a nice cushion against possible future downturns. There’s still a lot of financial runway and wealth in agriculture, with an estimated $4 trillion in farmland value alone.

In the 2023 America’s Farm and Ranches at a Glance report, issued by the USDA in December, only 26% of U.S. farms held debt. The caveat is the bulk of the farm numbers in the report represent, by most standards, extremely small farms with operators having meaningful off-farm income. It’s an interesting report nonetheless.

However, a lot has changed in the past 12 months. For many, 2023 ended up being noticeably less profitable than anticipated. Considerably stronger headwinds face crop producers as commodity prices have markedly softened. Margin compression is clearly being felt. Year-over-year prices of corn, for example, are off approximately 30%. For many producers, that can equate to a potential revenue decline of $300-400/acre.

Producers should pay particular attention to year-over-year changes in their liquidity or working capital. Additionally, focusing on earned net worth changes should flush out large swings and changes in crop inventory and prices from the prior year.

That being said, there are areas where nice margins exist. Sugar beet producers had a very nice year in 2023. Cow/calf producers are taking advantage of excellent prices. In other commodities, producers who had decent crops, were able to take advantage of profitable prices and did a good job forward-marketing also fared nicely.

The big question is, what changes does an operation make when high profit margins go to low (or negative) margins?

What can producers actually control? Higher expenses seemingly always outlast higher incomes, which leaves a much thinner margin for error when making choices and decisions affecting farm operations.

There’s also a lot of unsold 2023 crop inventory locked away and sitting in producers’ grain bins. Most of those bushels are unpriced with seemingly not a lot of upside marketing opportunities on the horizon. As I write this, local cash corn prices have a “3” in front of them – it’s been a while since we’ve seen sub-$4/bushel corn. In the near term, with a gloomy outlook for commodity prices to rebound and pry those grain bins open, there’s a fair amount of “store and ignore” attitude.

Especially for producers that have operating loan balances, the per-bushel cost to carry the inventory is considerably more expensive given the substantial hike in interest rates. The current outlook for 2024 commodity prices is likely below many producers’ cost of production or break-even levels. But there are upsides with respect to the cost of some of the crop inputs. Generally speaking, fertilizer is less expensive than in previous years. Fuel and chemical in many cases have seen lower prices than previous years as well. Conversely, land, seed and interest costs seemingly haven’t declined for many producers.

Despite these headwinds, top-notch producers find a way to remain profitable. They know their cost of production and break-even levels, watch their leverage, and monitor their financials at least quarterly – if not monthly.

There are a number of outside influences and dynamics affecting agriculture, and though largely out of a producer’s control, they are still worth watching and monitoring. These include:

• Farm bill: The bill expired last fall and was then extended by Congress, but it’s becoming apparent a new farm bill is a very low priority in the U.S. Senate and House of Representatives. It might be wishful thinking to see something get done this year.

• Domestic politics and 2024 elections: It’s a real wild card, to be sure, with respect to who ends up controlling the White House, the Senate and the House, and what

that would mean for the agricultural sector and farm policy. It would seem to be a safe bet that gridlock might still be the name of the game regardless of the outcome. One interesting side note: not only do we have elections in the U.S., but 50% of the world’s population will also have an election in 2024, including eight out of the 10 largest countries in the world. That’s likely unprecedented.

• Environmental issues and consumer preferences: Concerns related to climate change, water issues, and related topics – are these a threat, or is there an opportunity embedded in there somewhere? Take Sustainable Aviation Fuel (SAF), for example – there likely needs to be scalability to make SAF viable in the long run. To get to scale will probably require government support and incentives.

• Trade policy: Exports of many of the agricultural commodities we produce are being replaced by Brazil. For example, Brazil now accounts for a whopping 70% of all soybeans exported to China, while the U.S. is down to 24%. Moreover, Brazil is exporting soybeans to the southeastern U.S., and is adding grain production equal to all of Iowa’s grain production every 4.1 years – wow! Additionally, they’re already in front of the U.S. in terms of producing SAF-friendly ethanol fuel.

• General economy and growing cost of the national debt: Currently, the interest bill alone on the national debt is close to $3 billion/day, and it continues to grow as the debt increases and the interest rate on the debt continues to go up. Simply put, it’s unsustainable.

• Geopolitical events: Obviously this is a really big one. Ukraine/Russia, China/Taiwan, the Middle East –the list goes on.

Agriculture has always been a cyclical business. While we celebrate and are grateful for the good times, we also need to prepare for the down times. But it’s still a great business to be part of, with enormous opportunities in addition to being an awesome lifestyle. Don’t be scared – be prepared.

Is It Real, or Is It Memorex?

Those of us in the Baby Boomer generation (or older) may recognize the headline of this article as a slogan for a nowfamous 1976 commercial featuring Ella Fitzgerald and a cassette (yes, cassette) tape recording. Memorex claimed that the cassette recording of Ms. Fitzgerald hitting a high note could break a glass just as her singing live would do. The phrase stuck, and is now used to question the authenticity or reality of something – which leads us to the current and future benefits and risks of artificial intelligence (AI).

These days, you can hardly pick up a business journal or newspaper without seeing an article about AI and all the phenomenal things it’s able to do, such as replacing repetitive jobs traditionally done by humans. Some estimates predict that by 2032, AI could impact and change about 50% of all jobs in the U.S. economy.

I need to offer a disclaimer right out of the gate: I am not an IT expert. In fact, I’m the farthest thing from it – just ask most anyone I work with! But make no mistake: AI is here, it’s not going away and we’re not going to put the AI genie back in the bottle.

DEFINING AI

What really is AI? The Oxford dictionary defines it as, “The theory and development of computer systems able to perform tasks that normally require human intelligence, such as visual perception, speech recognition, decisionmaking, and translation between languages.” In other words, automating tasks and decision-making that a human normally or ideally would do.

AI is being used to create human likeness that mimics human behavior. AI can clone specific voices, images, faces and more. It may already be hard to know what you are seeing or hearing (we may have to ask ourselves, “Is it real, or is it AI?”).

We often hear about ChatGPT, one of the more well-known AI examples. ChatGPT is an AI chatbot that uses natural language processing to create humanlike conversational dialogue.

While AI has been around for a number of years, it’s rapidly improving its accuracy and possible uses. Experts claim that in 2020, AI had a human IQ equivalent of 80. Scientific American magazine recently gave ChatGPT an IQ test, and it scored 155. Who knows where it will be in another 5-10 years?

AI can do some pretty amazing things. Self-driving tractors, crop scouting using pictures, predicting and forecasting yields and risks, crop breeding, and monitoring cow health and behavior are just a few areas where there’s real opportunity. - Lynn Paulson

PROS AND CONS

What can AI do well? For starters, it can do things such as identifying items in pictures, checking license plates, mobile banking, medical imaging, and finding hidden information for crop and livestock producers. It’s great at crunching big data and picking up patterns, social media, self-driving cars, monitoring your smartphone habits, and performing searches to identify consumer preferences and patterns. It’s no coincidence that shortly after you Google something, you start getting ads on the topic you just searched.

What are some of the biggest risks of AI, or some areas it hasn’t mastered? Privacy, ethical dilemmas, societal implications, security and legal concerns are a few that come to mind. Emotions and morals are largely irrelevant for AI. In relying too much on AI, we risk the loss of human connection.

AI has a hard time saying, “I don’t know.” It doesn’t explain its decisions, and it doesn’t use common sense. It doesn’t feel sympathy or empathy (or anything for that matter), and it cannot make moral judgments. It can make wrong answers sound right.

Given all that, what’s the benefit – specifically for agriculture and producers? AI can do some pretty amazing things. Self-driving tractors, crop scouting using pictures, predicting and forecasting yields and risks, crop breeding, and monitoring cow health and behavior are just a few areas where there’s real opportunity. It’s estimated that AI, through precision agriculture, could boost crop yields by 10-25%. Or, consider the potential impact to the banking sector: A recent McKinsey report said that banks could boost their earnings by $340 billion annually through the use of AI. As many as 70% of banks’ business activities could have automated parts with relatively few untouched jobs. I’m not sure that’s a type of bank most folks want to be part of – but it’s also possible folks may not even know.

It can all be very exciting when you consider the enormous efficiencies AI can create. But it can also be quite daunting and scary when you think about the unknowns.

For all the amazing potential benefits AI brings, there may also be significant downsides – some of which we may not even completely understand today. There are already conversations within the AI industry itself, as well as in politics, about pumping the brakes until we can more fully understand the risks and potential consequences.

The news is full of AI stories – AI writing essays and papers for high school and college students, writing legal briefs for attorneys, its role in the spread of misinformation, even possibly playing a large role in influencing political elections. But despite all this, AI cannot replace human problem solving and creativity, our moral compass, human intuition and emotions, our critical thinking skills and common-sense reasoning.

One thing is for certain – we’re just starting to scratch the surface of this phenomenon and it clearly isn’t going away anytime soon. But in the meantime, ask yourself – is it real, or is it AI? Stay tuned!

- Lynn Paulson

What to Know About Rising Rates: Q&A with Bell Insurance

Over the last few years, overall insurance premiums have increased with most carriers. Severe storms and extreme weather have led to significant claims activity, and high inflation and supply chain disruptions have substantially increased the cost of rebuilding or replacing vehicles and buildings.

Because of these factors, home insurance rates increased between 10 and 35 percent from May 2021 to May 2023, according to research by insurance marketplace Policygenius. The largest increases were seen in states more prone to natural disasters like hurricanes or wildfires, but even states in the Midwest saw major increases. And in some places, it’s becoming harder and harder to get new home insurance at all.

Given these extreme challenges in the insurance marketplace, we asked Sean Bertie, a commercial lines producer with Bell Insurance in Fargo, what farmers, ranchers and producers can do if they’ve seen their rates go up, why they should review their policy every year, and what makes Bell Insurance unique.

HAVE THE NATIONWIDE INSURANCE TRENDS BEEN IMPACTING PRODUCERS IN OUR AREA? WHAT STEPS CAN SOMEONE TAKE IF THEIR PREMIUMS HAVE INCREASED?

Sean Bertie (SB): Yes, premiums are absolutely rising around the region. In some cases, they’re up as much as 30 percent from just last year, and as much as 50 percent over the last three years. In addition to premiums getting more expensive, we’ve also seen carriers trying to limit their risk by adding deductibles for wind/hail damage and/or exclusions for roof cosmetic damage. These are all significant changes.

For someone looking to try and get their rates back down, there are steps you could take, but it would all depend on your personal situation. If you’re comfortable taking on more risk, you could look at increasing your deductible or perhaps self-insuring some of your assets, which is something we’ve seen happening lately.

Another option could be to implement better safety and loss control measures. That could include hiring drivers with limited violations on their driving record, looking for opportunities to improve your on-site safety procedures, or updating your employee handbooks. When you take those types of actions, insurance providers may be more willing to give you better pricing on your premiums. In the insurance industry, we call it “best-in-class practices.”

Reviewing your current policy on a regular basis is another way to potentially find opportunities for lowering your premiums. Or, depending on your situation, you could request a new quote from a different provider and see how it compares with your current rates and coverage.

Sean Bertie Commercial Lines Producer, Bell Insurance

HOW CAN A PRODUCER DETERMINE WHAT LEVEL OF RISK IS APPROPRIATE FOR THEIR SITUATION?

SB: It largely depends on the financial stability of an operation and how much a producer can afford to pay, or not pay, in the event of a damaging storm or fire, for example. Let’s say you lose a building or a piece of equipment in a storm or a fire – would you be comfortable paying for the entire cost to replace it out of your own pocket? And would you be able to withstand the loss of the building or the equipment in your daily operations? Those are questions that need to be considered carefully and balanced against the cost of higher premiums.

WHAT ARE SOME THINGS TO ASK WHEN REVIEWING YOUR POLICY?

SB: You should ask your provider whether all of your buildings, equipment or livestock are covered (especially if you’ve had any change since the last time your policy was reviewed), whether you have pollution coverage, and whether you’re covered for commercial risks on your property like a market or public event. If you’re paying for a level of coverage you no longer need, or if you don’t have coverage for something that you should, then those are both reasons why you’d want to update your policy. You don’t want to wait until after a severe storm to discover that you’re not covered for hail damage because you have a cosmetic damage exclusion that you didn’t know about, for example.

WHAT’S IMPORTANT TO LOOK FOR IN AN INSURANCE AGENT?

SB: Most importantly, you should work with someone you trust who has a strong service team (such as an account manager, claims handler, etc.). You need to be able to trust the agent, and you need to be able to rely on their expertise in order to provide you with the best policy they can. That doesn’t necessarily mean the cheapest policy, but the policy that is most appropriate for your situation.

Beyond those factors, you of course want to be assured of the financial strength of the insurance company, and of their ability to respond to claims in a timely fashion. Bell Insurance strives to make sure all our insurance company partners have a financial score of “A” or better.

These are all things you should ask about when you meet an agent for the first time. Be straightforward about what you’re looking for, what you know or don’t know, and what they’d recommend. That can set the basis for a strong relationship moving forward.

WHAT ARE SOME OF THE DIFFERENTIATORS OF BELL INSURANCE?

SB: At Bell Insurance, we hold ourselves to a higher standard when it comes to client service. Any organization can say that, but we truly believe it’s one of the things that sets us apart. Our agents go above and beyond for our customers to put together a personalized policy that fits their needs, whether that’s personal, commercial, farm and ranch, commercial ag, individual and group health, or other types of coverage.

Another differentiator is that we’re able to offer a unique holistic approach, as Bell Insurance is just one part of a larger organization that also includes banking, wealth management and mortgage services. Bell has everything under one roof, which can be a huge benefit to our clients.

* Bell Insurance Services, LLC is a wholly owned subsidiary of Bell Bank. Products and services offered through Bell Insurance are: Not FDIC Insured | No Bank Guarantee | May Lose Value | Not a Deposit | Not Insured by Any Federal Government Agency.

If you’re interested in requesting a quote, give us a call at

800.369.2501

You don’t want to wait until after a severe storm to discover that you’re not covered for hail damage because you have a cosmetic damage exclusion that you didn’t know about... - Sean Bertie

If you’re ready to talk about your farm financing, call an experienced Bell Bank ag lender in your area. We’re proud to serve American farmers and agribusinesses!

Our roots run deep. Bell has the area’s longest-serving group of lenders, with more than a century of experience among them. We understand that as the business of farming becomes ever more complex each year, you need a lender who understands that challenges are opportunities for success.

We have money to lend. Find greater stability from season to season with a long-term loan, or use shorter-term loans to increase cash flow to your farming operation.

Lynn is Bell’s director of agribusiness development. He writes and speaks about agricultural lending and finance, the global economy and the ag economy.

He has expert knowledge of the ag industry, having worked in ag lending for more than 30 years and as a retired owner and operator of a Benson County, N.D., family farm. His banking experience includes merging several banks and holding companies and growing the new company to $600 million. He has also served on various financial boards.

Lynn Paulson

Jerry Polejewski

Bryan