Bob Campbell is a Frontier Farm Credit senior vice president, leading lending in eastern Kansas, where the financial cooperative serves more than 6,000 farmers and ranchers. He draws on four decades in agricultural lending and current market trends to outline what producers need to focus on in a changing economic environment.
Interest rate reality
Interest rates are top of mind when producers talk with their lenders, so Bob Campbell starts every conversation by level setting expectations.
“Interest rates are back to normal,” Campbell said. The low and ultralow rates of recent years were the anomaly. Today’s rates, he said, are more historically typical.
While nobody can predict the market factors that shape rates, Frontier Farm Credit expects the Federal Reserve to keep its prime rate between 6% and 8% for the foreseeable future. The prime rate is currently on the upper end of that range, so producers might see some downward movement, but nothing that would allow them to use refinancing as an easy fix for cost-structure problems, Campbell said.
Most producers with long-term debt took advantage of historically low interest rates. Farmers also are coming off back-to-back years of record profitability, putting them in a good financial position as they enter a new cycle of lower grain prices and tighter margins.
“For diversified crop and livestock operations, it’s critical to identify the most profitable areas to minimize losses and understand what payments and total debt structure will look like going forward,” he said.
Every downturn presents opportunities, and diversified operators who focus on profitability and liquidity across enterprises will be the ones who grow and expand their operations, Campbell said. Producers can look for synergies to balance their risk and offset potential losses. He said, “Our most successful customers understand the risks in each enterprise and capitalize appropriately.”
Diversification opportunities
In times of uncertainty, diversification can provide new opportunities to stabilize income streams and spread-out risk. For example, producers looking to augment their grain operations can consider adding animal production when purchasing additional land isn’t an option.
This strategy can also be beneficial for bringing the next generation back to the farm. When weighing the benefits of an operational investment against decreased working capital, Campbell suggested producers ask themselves:
- How well is my operation performing in relation to my long-term goals?
- Does my financial position reflect the risks I’m taking, and how do those risks impact my liquidity?
"With higher rates and production costs, producers need to be sharper with their numbers and ready to pivot to meet the demands of their operation," Campbell said. "That means continuously evaluating your risk management strategies and how effectively you are marketing in each area."
Producers know how to manage a down cycle, Campbell said, and today’s environment might require several adjustments, including getting a handle on cost-of-living expenses. Other strategies might involve negotiating cash rent with landlords, selling underperforming assets, sharing equipment or finding additional revenue streams. Producers at all levels have options.
“It’s also a good idea to reevaluate crop and livestock insurance plans on an annual basis to ensure your coverage aligns with the current needs and goals of your operation.”
Solutions to support growth and stability
Every farm or ranch is different, and what works for your neighbor might not be the right solution for you, Campbell said. This is where your partners and advisors can help.
As a lender, Frontier Farm Credit can finance the whole balance sheet to help customer-owners reach their goals, even in a down cycle. If a customer is trying to grow, he said, we also have crop and livestock insurance specialists to help ensure coverage is aligned with their expansion plans.
“It's important to have ongoing conversations with your lender about where you are today and where you want to be in the future, and that’s where combining lending and insurance expertise tailored to the unique needs of your business is critical,” Campbell said.
