Mixing The Good With The Bad

While we often feel that specialized farm equipment manufacturers sometimes like to view the future behind dark glasses, we’re also convinced that some members believe the Shortliner takes special pride in viewing the same future through rose-colored glasses. We admit to the fact we’d prefer more optimism than what we’re now constantly being bombarded with. The following has a little for each side of the story.

John Kearney, CFA, writing for his newsletter and being reported on by Morningstar, asks the question, “With a reeling global economy and tight credit markets, is there reason to believe agriculture equipment companies can regain their traction?” He answers, “We think this space still offers attractive prospects for several reasons.”

Kearney goes on to site commodity prices. While down from their record highs, they remain much higher than historic levels. He goes on to say, “[they] should continue to allow farmers to generate attractive returns.” He cites USDA statistics saying that, while farm income will probably be off some 20% from record highs reported in the last two years, the farm agency still believes they will be 10% higher than the average recorded over the previous 10-year period.

USDA also says farm balance sheets are still strong. Their debt-to-equity ratio is now at a 40-year low, and Kearney believes that ag should be better able to weather any credit downturn than other industries. Kearney cites several other factors promising ag’s rosier future, including better world diets, the tighter ratio of grain supplies, relative to use making for higher grain prices and the relative strength of agricultural banks leading to more farm credit availability.

On the negative side, there’s adverse weather news (droughts) in much of the world, along with tighter credit restrictions in international markets, constricting much equipment exporting.

Now for the other “down” side from the Kansas City Fed. They report on tightening agricultural credit standards. While the Fed says that, although ag banks (those banks defined by the Fed as having more than 14% of their loan portfolios in agriculture) outperformed their other commercial brethren, ag bankers are now shifting more of their lending risk to borrowers.

Contributing to the dip in ag bank profits were a decline in interest rates on agricultural loans, a rising cost of capital which squeezed bank profits and climbing delinquency rates on ag loans. To combat this lowered profitability, banks have tightened lending standards on ag loans, particularly increasing collateral requirements and shrinking loan maturity. On the “up” side, ag loan rates originated by ag banks are at relatively low interest rates.

For those of you who cannot get enough of Matt Lauer’s tough economic news, we continue with a special Shortliner economic report (i.e., a FEMA member from central Illinois who wandered into the room) for a congressional briefing to Illinois businessmen from IL Rep. John Shimkus (R). He says that comment for the previous Farm Bill has now been extended for 60 days, meaning that it is unlikely that farmers will even know about it before planting season begins.

Of the first six goals to be undertaken by USDA under the new administration, only one of them has anything to do with keeping the U.S. ag sector intact. And that one focuses on the growth of organic agriculture. (Boy, are we going to be healthy!) To top off the Shimkus report, he says that railroads no longer want to haul anhydrous ammonia due to liability concerns. Some railroads have increased rates for anhydrous as much as 300%. Other railroads will not ship to clients who do not own their own sidings.

If you need any more dismal news, tune into the
Today Show at 7:00a.m. CST.