As 2024 continues to take shape, the ag financing market remains a complex landscape. There are a number of challenges at play including diminishing COVID-era funding, rising input costs, and fluctuating interest rates. As net farm incomes face pressure, the sector continues to grapple with the implications of high interest rates and the impact of global conflicts.
We sat down with Bell Bank’s Senior Vice President (SVP) and Director of Agribusiness Development Lynn Paulson to learn more about the landscape.
About Lynn Paulson
Lynn Paulson, SVP and director of agribusiness development at Bell Bank, has deep roots in the local agriculture market. He has financed farm operations and businesses for the majority of his life, and he has continued to own a family farm located in Benson County, ND.
Q&A
Q: What’s on the top of your mind right now when it comes to ag finance?
A: We’re coming off the heels of 2020, 2021, and 2022 being phenomenal profit years in most of the ag world— especially in grain crops. I’ve been doing this for 40 years and I don’t think I’ve been involved in another three-year stretch where so much money has been made. 2023 was okay—yields were pretty good but commodity prices were down 20-25%, so that certainly had an impact. But I think 2024 is where we are going to see margin compression really start for a couple of reasons. Number one is we have much higher interest rates. So, for the people who are borrowing money, going from 4% to 8% or 9% is a significant increase—especially given the amount of money needed to operate today’s farming operations.
When I started in this industry 40 years ago, a $100,000 line of credit was pretty big. Now, that $100,000 is $1 million
However, I think producers right now are generally in really good financial shape. They’ve got a fair amount of financial runway built up, but there are also so many things going on that are outside of the producer’s control. You’ve always got Mother Nature, and, right now, there are plenty of geopolitical factors to contend with. That is kind of the knife that cuts both ways. The war in Ukraine certainly helped commodity prices in the short run, but what it does in the long run remains to be seen. And all the other things that are going on in the world will have an impact as well that is yet to be determined.
You’ve got your environmental issues out there—are they threats or opportunities? There are things like sustainable aviation fuel, which reminds me of ethanol which really changed the whole landscape of crop farming in the early part of this decade. We simply need to find more uses domestically for all of the farm commodities we produce. Certainly, part of that may be ethanol for aviation or soybeans for aviation. We use 25 billion gallons of aviation fuel a year. So, there is a huge market. Aviation also leaves a huge carbon footprint, so there are a lot of interesting dynamics at play.
Lately, farmland prices have been really high. We don’t see necessarily any big reductions of those coming. But, there are a lot of things going on in the ag world. The 1980s, which I went through, was when the last really big farm crisis occurred. We’re not in the ’80s by any means, but the ’80s were highlighted by increased inflation, and increased interest rates—some of those same factors are creeping in, but the major difference is our ag producers are in much better financial shape now.
Q: Do you have any sort of insight on what is to come due to these ongoing geopolitical factors you mentioned?
A: It’s a lot of speculation right now. Ukraine was a really large agricultural exporter of a lot of the same commodities that we produce—wheat, corn, soybeans. Since Russia invaded, they had to find alternative ways to get some of those same exports out, but it’s really been very little. So, somebody had to come in and fill that need, and the US was in a position to do that. In the short term, our farmers were able to take advantage of someone else’s adversity,
China is still a huge buyer of agricultural commodities. If China was to invade Taiwan, that could be a potential game changer.
Honestly, one of the biggest risks that American agriculture faces, at least with respect to exports, is Brazil. First of all, they are the largest soybean exporter, and they now are the largest corn exporter. They have maybe 100 million more acres that they can bring into production. In many respects, they’ve got currency advantages—that’s a real big deal. Don’t sleep on the impacts of Brazil. At some point, our competitive advantages become fewer and fewer.
Q: What should producers be doing to prepare for those shifts and challenges?
A: I think they need to be aware and pay close attention to their financial statements. They need to watch their liquidity and cash positions. When these downturns come, you need to be able to bridge those gaps until the next positive cycle.
Agriculture is a hugely cyclical business. In general, when it comes to agriculture, it’s not always about how you handle adversity, it’s about how you handle prosperity. It’s about what you do with your money in the years that you make it. It’s about doing the right things at the right time—investing back in the farm, buying farmland, and keeping cash on hand to take advantage of opportunities. I like to tell producers, don’t be afraid, be prepared.
Q: So, overall, you think 2024 may be a tough year?
There’s no doubt about it because, like I said, commodity prices are off 20% to 25% from a year ago. And, expenses really haven’t gone down. Fertilizers have gone down a little bit, but, for the most part, they aren’t going to raise the crops for less.
Q: Is there anything else you want to say to our readers?
It’s always kind of a slippery slope for bankers to be talking about lifestyles, right? But you know, you need to watch those expenditures right now. We’ve got some folks that live fairly large, and when times are good, that’s great. But it’s something we need to start watching right now. Once you set your spending habits, it can be hard to change.
We’ve gone from historically low rates over the last decade or two to a place where people think they’re really high. Right now prime interest rates are about 8%. Back in the early ’80s, it was 20%. So, historically, we’re really not that high. However, the dollars that people have to borrow to finance their operations are so much larger that any increase in rates can be impactful.
Everybody in this region has some connection to agriculture. We’re an agriculture-driven economy— most everyone in this region benefits from a strong farm economy. It’s a great business to be part of with enormous opportunities in addition to being an awesome lifestyle.
