Midwest Agriculture Conference: Session 3

NATE KAUFFMAN: OK. Well good afternoon, everyone. It's been a good day so far of discussion on farm inputs. And pleased to be able to get started this afternoon with our panel session. My name is Nate Kauffman. I am senior vice president and branch executive in our Omaha office of the Federal Reserve Bank of Kansas City.

As you might imagine, in the Kansas City Fed district, which covers seven states in the middle of the country, agriculture is also an important industry for us. So we've appreciated the opportunity to collaborate and interact with the Chicago Fed with David and others on his team when it comes to topics surrounding agriculture, and especially with a panel like this, that's going to be focused specifically on finance.

So we spent some time earlier today talking about what are some of the fundamental drivers of input markets and costs. Spent some time talking a little bit about gaining efficiencies. And that conversation really then was continued over lunch, with Matt talking from his perspective at Landis what that looks like in a bit broader context as it relates to things surrounding innovation.

So the next portion of this discussion then naturally leads into the financing side. And I think it's reasonable to expect that to drive some of those cost reductions, to drive innovation, and in thinking about how farmers manage and manage their own farm, make decisions, and focus on profits, that financing and credit availability is a pretty big component of that.

So pleased to be able to moderate the panel discussion for this afternoon. And the way that we're going to structure the panel, I'll just give a few ground rules. And this will be an interactive session. So look forward to questions that people may have. I'll introduce each of our panelists here in just a minute, and give the panelists an opportunity to give a high level overview of what their role is, the organization or business that they represent. And we'll get started with questions. So the majority of our panel session for this afternoon will be focused on questions.

So we'll start first with-- and I'll introduce each panelist here. And then after that, I'll sit down and give each of you a chance to offer some opening comments. Mike Gunderson. And Mike is the Chief Credit Officer of Farm Credit Illinois. Has been around agriculture for many years, and before joining Farm Credit Illinois as Chief Credit Officer, was a professor, actually at Purdue, focused on agribusiness strategy and finance, also with a degree from Purdue University and a master's from Cornell. So Mike will be our first panelist.

Next up will be David Hardin, who is manager of Hardin Farms. And this is a farm that is close to Danville, Indiana. Has a background in animal science, also a Purdue grad. Good to know we've got the strong contingency of Purdue. Has responsibility for a 600 sow farrow to finish unit that produces about 12,000, excuse me, pigs annually. Has been involved also in the industry by way of the Indiana Pork Advocacy Coalition, and also a member of the board of directors of the Indiana Pork Producers Association. So looking forward to hearing from David.
 
Next we'll have Susan Whitson. And Susan is CEO of First Bank and also President of its financial services holding company, first of Waverly Corporation in Waverly, Iowa. This is a bank that manages about $740 million in assets, with a relatively large role as it relates to agricultural lending. Pleased to be able to make the connection with Susan that she is also an Iowa State grad. So I am as well, having finished my degree at Iowa State. And also, as some of you may know or not, Susan serves on the Board of Directors here at the Chicago Fed, so is very familiar with the focus of the Chicago Fed on agriculture.

And then last but certainly not least, John Winger is the director of the agriculture and turf retail credit delivery division at John Deere Finance. Has many years of experience in the finance industry and with Deere, has a background in finance, and also from the University of Iowa, has spent time throughout Europe and Canada in his career with John Deere Financial. And we'll spend some time talking about his perspective from Deere.

So with that, I'll sit down here. And Mike, I will give you the first chance to get us started with a few opening comments, and we'll go from there.
 
MICHAEL GUNDERSON: Yeah, thanks, David and Fed for hosting us. And thanks, Nate, for the invitation. Farm Credit Illinois. We serve the southern 60 counties in Illinois. We have about 13,000 members that we lend to and help their farm families succeed. We're a part of the Farm Credit system. And so certainly appreciate our partnership with Compeer and others that are in the room.

And an unconventional path to the CCO seat, as Nate pointed out. Spent some time at Purdue University teaching. But I am a University of Illinois undergrad, which is why I've got the orange and blue on today, so.
 
DAVID HARDIN: Do you want me to go next?

NATE KAUFFMAN: Yeah, we'll go to David next.
 
DAVID HARDIN: OK, thank you.

NATE KAUFFMAN: I mixed up the order here.
 
DAVID HARDIN: That's all right. I'll echo Mike's comments and thank David and the Chicago Fed for having us here today to discuss these important topics. Nate addressed our farms livestock component, but we also have a grain division. We produce [INAUDIBLE] preserved corn, soy, and wheat. With being close to the Indianapolis market, we're very lucky to have a lot of end users there close.

We've got a relatively small staff. Besides myself, I've got four full time employees and about three part time employees that help us out. Our farm, I'm the seventh generation to farm in the Central Indiana area, and I'm right now trying to figure out which members of the eighth generation have interest to figure out what succession planning looks like for us. But we have about a dozen different input suppliers between both the grain and the livestock side that we work with. And so we've got different strategies that we use for about every one of those.
 
NATE KAUFFMAN: Thanks, David. Susan?
 
SUSAN WHITSON: OK. And I'm Susan Whitson. I also would like to thank the Chicago Fed for hosting and Nate from Kansas City for supporting Midwest ag and for hosting this conference. Our bank is 160-year-old community bank. I think I was thinking the other day it started in the back of the hardware store because that's where the safe was.
And if you think about how things need to evolve and change over time, what we offer is probably the personalized relationship to be able to have that trust and ongoing relationship with our clients, and knowing that we need to evolve and change as our clients' needs continue to change over time.

Our bank is currently about 40%, 45% ag and 30% commercial. On the balance, I would say it would be residential, real estate and consumer. And some of that residential real estate, I would say, is development real estate too, because there's definitely some housing needs. But understand, even though I say 45% is ag, we're in rural areas. Everything's ag at the end of the day with what we look at.

As a community bank, 97% of the banks in the United States are community banks, which means we have less than $10 billion in total assets. But we do have about 15% of the total banking assets in the United States. So there's definitely a niche there. A lot of us are in more rural areas. I think you will find the Midwest, Iowa, Minnesota, Illinois, Texas are probably the heavily banked states, which definitely have a lot more in the community side.

One of the things I also want to mention about as ag, we're talking about ag cycles and ag financing. One of the things that we consider as an ag bank is ag is us. As ag goes up and down, we will go with it also and adjust our balance sheet. That is our livelihood, and we want to see our producers be successful. And that is the end goal in our part to say, why does it make sense?

And this was coming out of the '80s that we added education, financial management. Those kinds of tools are what we talk about. So as we're looking at things that they might be looking at doing or want some input on, it's really kind of coming back to the financials and being able to provide our insight and what we see in the prospect for what they may need in financing.

And knowing that there's such a thing as over lending. Sometimes too much money can get people in trouble too. So it's being able to find that right perspective and understand what the client's real goals are, to be able to assist in that process. So I find the value of a community bank really is that personalized service that we can provide and making sure that we're local and available, and we're supporting the community, which is part of what supports our producers also. So I'll stop there.
 
NATE KAUFFMAN: Great. Thanks, Susan. John?
 
JOHN WINGER: Yeah. Good afternoon, everyone, and thank you for allowing me to come here and listen to all the great speakers today. I got an education on many different facets of the business that I really hadn't thought deeply about. So thank you to the speakers. Appreciate that, and thank you for having me.

I'm John Winger. I work for John Deere Financial. And like Nate said, I've been with Deere for a little over 22 years now. And I've had different roles throughout my 22 years that entail lending to our dealers, to lending to agribusinesses, and now lending to our retail customers. And I've done this type of work in the US, in Europe, and in Canada. So I've been blessed with a great organization to have given me the opportunity to see different things in life as it relates to how finance works in different markets.
 
We have 2,500 people employed globally. We do a lot of direct lending, but we also partnership with many different countries and different banks in those different countries to deliver our financing offering. What I will say about my current responsibilities is I oversee any credit application that comes in from the US or Canada, and I have 80 people that are located in Des Moines and, well, 40 people in Des Moines and 40 people in Madison that are basically adjudicating credit, that are coming in from over 9,000 ag retailers and John Deere dealers.

And of course, like Susan said, we're committed to the industry. We're a captive finance company, so we want our enterprise, our equipment brethren, to succeed in their goals. And they challenge us all the time as it relates to how do we create innovative finance offerings to support the technology that we're actually putting into the marketplace. Our smart industrial strategy, if you haven't heard of it, is centered around tech stack. And that tech stack, you've heard a lot of the speakers talk about that today, and we're finding new ways to make sure that we're getting it in the hands of our customers. So with that, Nate.

NATE KAUFFMAN: Great. Thanks, John, and everyone else. And you mentioned 80 people. And I think a number of automated processes in that as well, which is a topic that we will get to a little bit later.

So as moderator, I have a few questions that I'll get us started with. And I'll start with some questions. In the meantime, would ask anyone here to jot down your questions, because we will soon get to a point where I'll turn it to anyone here to ask questions as well.

Matt mentioned during his comments at lunch that farmers are primarily concerned with two things. One was profits and the other was ease of doing business. And so I guess as our starting question, I'd be interested in each of your thoughts on how you see producers making decisions when it comes to financing inputs, especially where it's related to components that might not always be related to pricing.

So how do they think about interest rates and borrowing costs? How do they think about servicing, though, alongside that? What's your take on ease of business or other factors that might be non pricing components? So if you could each speak a little bit to your perception of where producers start in terms of the types of things that they might be looking for? We'll start down at the end, but I'll mix it up. Mike, I won't make you always go first.
 
MICHAEL GUNDERSON: Well, I was going to say you should have David start because that's one farmer. And then we should have all the other farmers in the audience answer it, and we'll know that it's going to be farmer specific how they make those trade offs.

But I think where we are in the space, we have to serve every potential borrower as well as we can. And they all weigh those trade offs differently. So we have to set up systems that will allow us to serve a very price sensitive borrower who doesn't value our expertise in away that works for them. And then we have some producers that rely on us to be their CFO and bring a lot of expertise to their operation and bring that discussion to them.

I think one of the challenges as a CCO is that my field, the lending officers out in the field, they push back on the amount of information we require, financial information. And you're talking about an ease of doing business. It would be easy to not collect a lot of information, but I'm not sure where we have a high touch, high tech philosophy at Farm Credit Illinois. And high touch first, high tech second. And so when you don't ask for a lot of information, it makes it really hard to help that producer be successful.
 
So we try to meet the customer. We try to meet the borrower or the member where they are and their trade offs of those things. And we try to set up the system the best that we can. But I think for those producers that are really serious about financial success in the future, they are more willing, more open to sharing financial information and getting an additional perspective on that as they do their business.
 
NATE KAUFFMAN: I might come over here, Susan, to you next, because you mentioned a little bit the relational lending side of that. So I'd be curious your thoughts on the same question. What do you typically encounter in terms of what producers might be looking for? And then how do you combine that with the vision that you described as it relates to relationships?
 
SUSAN WHITSON: Well, I think the first thing really is thinking about the relationship with the customer. We have a history. So when it comes to the ease of doing business, we already have that relationship, and you can build off of that when you're looking at future ideas. And sometimes it's just year to year as you're looking at the line of credit renewals for crop input financing. The producers do value their lender's input in various things. So I think there is value there. And that's probably on the service and the ease of doing business.

The secondary part of that is really understanding that competitive interest rates. Well, it depends. That's the producer's opinion. And sometimes they're different. They are not the same. And so it's pretty easy to be able to figure out what all the pricing is. But they as an individual have to decide what's most important for them when it comes to that.
Now, some of the lines of credit get larger. If you're looking at over 10,000 acres and some of those, every basis point adds up pretty quickly when you get to the larger lines of credit. So that definitely is some differences in the pricing side. But I would say the community value, bank value is really in the ease of doing business and the servicing side of how they need. And some producers want to talk to you every week. Some will see you once a year. So we're flexible in what their needs may be.
 
NATE KAUFFMAN: John, I'm curious your thoughts. And then David, I'll come back to you after that, and you can say you got all that right or here's the other things we're looking for. Go ahead, John.
 
JOHN WINGER: So maybe just to level set first. At John Deere Financial, we do installment and lease financing for our equipment. And then we also have a revolving product called multi-use account. And when we offered the multi-use account in the agricultural space, we really take a look at, OK, well who can we partner with? It could be a manufacturer and ag retailer.

And we basically sit down with them on an annual basis to say, what are your objectives in penetrating the market with the product that you want to sell? And so a lot of times we come up with buy now, pay for after harvest type terms, because we know their cash flow isn't going to be a steady cash flow throughout the year. When we're having those discussions, we also talk about no to low interest rates. Somebody's got to fund that.

And it's typically the manufacturer and/or the ag retailer that actually funds those types of programs if they really need to offer financing when they're selling their product. The reason why those ag retailers, I believe, come to us is because we've got an infrastructure that we've had since 1980 that basically supports that rather than the ag retailer offering trade credit, we're offering financing because of this very tried and true and tested system that we have.
 
And so it makes it very convenient for a farmer to go into either to any ag retailer and say, hey, put that on my multi-use account. And then we, of course, get the invoicing and we share the invoicing with them so they can see it all encompassed in one type of invoice based on transactional charges. So we believe that's our value proposition.

Now of course, as we continue to go down this technology path, this is the part where we have to even be more competitive in relation to the convenience factor. How can we make sure we're modernizing the tools that support how we communicate that information, especially with the fintechs out there? So that would be my answer.
 
NATE KAUFFMAN: Yeah, great. David, your thoughts.
 
DAVID HARDIN: I think this could be my cop out all day. I think that the panel has encompassed a lot of the things well. When Mike made the comment that you pull 10 farmers in a room, you're going to get 10 different answers is very accurate. That's why nobody can tell me I'm wrong with what I say here today.

But I think the common threads that you would find with most producers is the service aspect. Besides delivering me a good product, what other attributes are you going to be able to bring to bear for me? John makes a very good point about their farm plan where I can go--

JOHN WINGER: It's the old monitor.

DAVID HARDIN: I know the old monitor. You could say I'm old school with the multi-use. But you can go to multiple retailers and your bases are covered. With other producers or with other lenders, they might have things bundled in with different technology products that would help a producer out.

I would say one of the other things in ag that translates for all input suppliers, whether we be looking at, financing as an input or fertilizer, it's relationship, relationship. And a lot of times farmers' business will follow some dealer, even if they jump to a different supplier.

Ease of doing business. There are several revolving lines out there that you can get up to half a million dollars in unsecured loans. Well, to Mike's comment, that's helpful that if you're in a hurry, you don't have to give your entire detailed financial history to the lender. But you're probably not getting as much valuable information back from them about how you rate compared to your peers.

I would say that in farming, when times are good, there are a lot of very, very smart producers that can keep track of in their head this was the start of my bank balance at the beginning of the month. I know I have x going out, y coming in. At the end of the month, we're going to be net net. But in times when you've got margins either decreasing or going negative, that's not sufficient. You need to be able to get more granular as far as what your costs are per acre. So you know you can make the right management decisions to make sure that you're here next year.
 
NATE KAUFFMAN: My next question, I want to get in a little bit more to risks. And so I'll ask it in two different contexts. David, maybe your thoughts in terms of risk management tools and then the others on the panel in terms of how you go about evaluating risks. But maybe as a little bit of context, there's been discussion here already today.
 
And USDA released a new farm income update today that would verify an expectation that incomes are down this year. The aggregate number looks relatively modest, but I think if you get into the details a little bit more, what you will see is that most of that weakness shows up in terms of grain farms. And the revenue is down with lower prices and costs still relatively high that we talked about earlier in terms of reducing use or reliance on inputs to drive costs down.

There's a multitude of risks that we could spend the rest of the afternoon talking about, and we'll get into some of those maybe a little bit later. But my overarching question here as it relates to risks is, especially with that landscape in mind, thinking about some of the risks that we currently face with respect to finances, specifically profit margins, what would you highlight as some of the most important risk management tools now, as you're looking ahead to 2025?

And then for the lenders on the panel, how do you go about evaluating those risks, recognizing that there's a pretty significant variety of the type of operation? To your point, about 10 different farmers, 10 different answers, the sizes of those operations and complexities. And then thinking about this being a multi-year time horizon in terms of the decision for financing. So risks are notable, but I'd be curious, the panel's thoughts on managing those risks. And, David, we'll start with you.

DAVID HARDIN: People will often ask me if I like to go to Las Vegas or go to the casino. And I tell them, no, I gamble plenty with everything that I do every day. Because most farmers will do just about everything they can to mitigate what risks are foreseeable. For us on our operation, that goes with having what we hope is a multi-year marketing strategy where we're working to layer in sales at times that we know that we are going to be able to achieve the margin that we're going to.

And in these last few years when there's been such volatility in input pricing, that's been kind of hard. You sometimes feel like you have to grab a number out of thin air, almost, to come up with what your cost of production is going to be. Also that means whether you're working with both crops or on the livestock side, make sure that you are utilizing the subsidized insurance programs that are out there.

That makes sure that if you do have a bad year, either through crop failure or prices falling out of bed, you're going to be able to maintain cash flow. And for those of us that have got either mortgage payments or salaries, payroll that you're having to meet, those are the things that you want to make sure that you can do.

And for me, working with our input suppliers in the way that it's more of a partnership, we can share risk where it's acceptable. That's something that we're going to strive to do. And Mike will tell you who I'm talking about here. But an old ag econ professor that really beat into my head about preserving your working capital for those times that are not as abundant are very important. So we look at when possible trying to carry a little more cash into uncertain times.
 
NATE KAUFFMAN: John, we'll go to you next. Maybe thoughts on how you think about evaluating risks.
 
JOHN WINGER: Yeah. So like I said, there are multi-use accounts offering has been there for since the '80s. And we have a collection of data over a very long period of time. And because we have access to that data, we use a risk scoring model that helps us predict default based on an aggregation of those attributes and an assignment of what we will call a paper grade.
 
And we go through that anytime a customer comes in and if it's a new customer, ask for a credit limit. Or if it's an existing customer and they ask for an increase in their credit limit, we're going to put that request through this model, and it's going to produce a paper grade for us. And like Mike had mentioned, sometimes we're willing to do an unsecured a revolving limit without receiving financials, but that's for our best paper graded customer up to $250,000.

So we basically applied this model to all requests, but we try to tier it based on the credit profile of a particular customer. Actually, if it comes back and they're wanting more than what our model is suggesting, then we'll say, we need financial statements. And we'll go through the traditional underwriting process to really understand the cash flow, the leverage, the working capital position of a particular farmer. And again, we've applied this concept over the years, and we believe our model is really predictive.

And then when we're in a situation where we've had a relationship with a customer that's just going through the cycle or the bad times, we'll still do something for them, but we may reduce the amount. We may speed up the payment frequency. We may ask for a cosign or a guarantor. Or in this instance, we could ask for collateral, but we don't do that very often, because we're not very good at taking crop liens because we know the bank already has them.

So essentially, we're just trying to find solutions for our customers, and we try to do that in a way that's thoughtful, but also, like I had mentioned before, quick and easy, so that the producer or farmer doesn't have to worry about, hey, am I going to have enough limit to buy the stuff I need to actually cultivate my crop and take care of my crop?
 
NATE KAUFFMAN: Maybe just a quick follow up, John, and then any others that have comments on this in the comments as well. We were chatting about this a little bit last night. How often do you update those models, and how do you incorporate external risks in terms of the decision making process of those models to make sure that you're not missing something?
 
JOHN WINGER: Yeah, so we review the models thoroughly on an annual basis. We go to the credit bureau, and we evaluate the progress they're making on having more predictive models around risk. So they may come up with some new attributes. The best attribute we have is actually experience with ourselves. And we use that payment history to make sure that we're putting the right weight in the model based on those predictive factors. I can also tell you that it's interesting.

As a captive finance company, if we're giving you an installment or a lease-- installment loan or a lease to finance the equipment, and you have a revolving relationship with us, it's usually us that's first paid, because they don't want us-- producers don't want us to come and disrupt their operation by saying, we need your equipment or we're going to turn off the technology in your equipment.

So it's kind of a hard-- on the surface, it seems like a hard ball approach, but it really isn't. We're just trying to say, hey, we want to make sure that we're the solution provider for you. We're willing to take a little extra risk to make sure that you can succeed in your operation, because we know that farming is cyclical.
 
NATE KAUFFMAN: Yeah. Mike, maybe go to you next. Same question and we'll wrap up with Susan on this one.
 
MICHAEL GUNDERSON: Yeah, so I think I'm 2 years and 15 days with Farm Credit. And probably the accomplishment that I'm most proud of is our credit team has graduated from using dollar volumes for cutoffs to how risky is that relationship and how much do we have to assess that riskiness? A very low risk borrower who needs $1 million probably doesn't need as much attention as a very high risk borrower who just wants 250,000. And we've graduated to that over the last couple of years. So I think that's one thing that I'm really proud of.

I think a really important risk management tool for a farmer is as simple as a budget. And the number of our producers who struggle to put together a comprehensive budget and test that budget for some uncertainties they can't quantify is really a challenge. And so when they move down in that risk profile, as they move to a more risky profile, we put more pressure on them to do some planning, to do some budgeting.

And then the third thing I'd say, just as an organization we're really proud of is our young beginning farmer program. So we have a fresh roots program where we have a different set of standards when we analyze that risk for that beginning farmer. And part of that is we work with them to create those plans that we think are going to make them successful in the future. So doing that budgeting, creating those balance sheets, getting them in a sound position for financial management is something that we're really proud of.
 
NATE KAUFFMAN: Great, Mike. Susan?
 
SUSAN WHITSON: Just a couple of quick questions. The credit process of understanding balance sheets and income statements really does help the customers being able to know what their cash flow is. When we set up a line of credit, we're always looking at what does that look on a monthly basis? Kind of as you referred to as going, I know what my ins and outs are and going, what's an appropriate size line of credit for the requests that the borrower is making?

And so I think with all of our producers, we want them to be successful, and we find that that is a good process, because it helps you understand what's working and what's not working, particularly if you look backwards and forwards. I always look at we really rely on the fundamentals of credit as the other lenders do, understanding the five C's of credit. And knowing that the one thing I always look at is all payments made as agreed to me is not a predictor of the future. It's the why that goes with it. And what is it that's going to make that producer successful in the future?

I picked out a couple three things that we probably go into a little bit deeper just to understand. The first one I kind of think about as control of the land. And what you're looking at, is it owned? Is it rented? And what percentage of each? So when you're looking at the producer, and as they're making large capital investments, be it grain drying facilities, grain machine storage, or even some of the machine operations, if you're relying heavily on leased land, the likelihood of not retaining all that leased land is greater.

And so you have to factor that in. And if the producer were to lose a portion of that, then they've got overcapacity or excess debt or overhead for their storage. That's a little hard to rectify. You can sell machinery sometimes at a reduced price, but it's just knowing do they have that ability to make that adjustment if you've got something like that. So that to me is a risk factor.
 
Grain and livestock operations. We see a lot more volatility in the livestock, particularly over the last-- the earnings have been more volatile in that. So it's understanding each type of operation. Yes, we have dairy and cattle, and yes, you kind of have to look at each type necessary. And do they have the ability to be able to inject any more capital? That preservation of working capital has been really important. That's always been a part of our conversation. When times are good, we start talking about it because we know it's pretty easy to keep spending it. And so you've got to have those conversations regularly.

And then the third one is really assessing the management ability of the producer. As the operations become larger and more complex, and can that producer continue to manage labor, commodity pricing, or the purchase of the inputs and those capital expenditure decisions, the landlord relationships. It continues to grow what those responsibilities are as the operations continue to change.

And then the other factor I think about in the management ability, and this kind of goes back to a basic of lending, is when you start seeing split lines of credit. And that's when there's lines of credit at more than one financial institution. How do those layer? Who's in the lead? How do they manage? And usually that's a sign of an issue from us from a lending standpoint when you start seeing multiple lines of credit out there. So that's one of the cautions that we always look at too to go it's generally, even if it may be price incentive to begin with, it's harder to manage long term both for the producer and the lenders.

NATE KAUFFMAN: So I'm going to pick up that last comment a little bit. And I had a couple of questions here that I'm actually going to repurpose and collapse together under the topic of economies of scale and consolidation, which was something that we talked about a little bit over lunch that Matt commented on and was referenced a couple of times in presentations this morning, recognizing, for example, that there are economies of scale.

And as enterprises become larger, they can maybe take advantage of maybe have some price advantages there as it relates to securing inputs. And from a lender's perspective, obviously needing to take into account the variety of sizes when you're thinking about financing options.

So I'll start and ask David and then anyone else on the panel feel free to weigh in if you have some thoughts on this. So David, first for you, when you're making decisions on investments that would seek to expand the operation, what are some of the important discussions that you feel like you need to have as you're thinking about the financial piece that goes into that?

And then maybe for the lenders on the panel, as we're talking about this issue related to economies of scale and consolidation, Susan, you referenced financial partnerships or loans that may be secured in other places. I'd be curious how you think about some of the very large enterprises. And back to the topic of risk management, thinking about that nature of consolidation. So, David, we'll start with you and just your thoughts on what that looks like from a perspective of making investments and expanding the operation and what you think is important.
 
DAVID HARDIN: Sure. Well, I think the first thing that's going to go through my head as I analyze that is looking at back to capital replaces labor. Labor replaces capital. And seeing, especially in our geography, finding quality labor is hard. With our proximity to Indianapolis, we have to pay a competitive wage.
 
So I'm going to be looking at that, obviously got to take into account the ROI on that. When am I going to see the payback from that investment? And is the assumptions that I'm making about this, are those correct assumptions? And then also looking at, OK, is this, kind of speaking to her comments about whether is it going to be right sized for us currently?

Are we going to outgrow this investment in five years' time? Or if we because of development pressure to lose some rented land, are we going to be-- we don't want to be upside down. We want to make sure that we're going to be able to service the debt for that investment, whether it be something long term or whether it be an intermediate need, like a piece of equipment that we'd be getting through John Deere. So those are the initial thoughts that are going to be going through my head as I do the analysis on whether this is the right time and the right place.

NATE KAUFFMAN: I'll open it up here for the lenders next. And by the way, be thinking of your questions after the response here. I'll see what questions any of you might want to ask. I've got a number of other questions that I can ask, but I want to make sure that we give time to everybody here to be able to ask questions. So I'll ask if anyone wants to offer comments next rather than call on anyone specifically.
 
MICHAEL GUNDERSON: So I'll just say, I think the cliche that's resonating with me is if you borrow $1 million, your lender owns you. If you borrow 10 million, you own your lender. I think when we think about consolidation and we think about economies of scale, it also by necessity means that you're concentrating that risk in fewer individuals.
And I think part of our strategy is to have our portfolio diversified across a lot of producers, not necessarily big producers. So now we do serve plenty of big producers. That's not what I'm saying. But I think the pandemic reminded us there is a hidden cost when we only prioritize economies of scale relative to having some diversity and having some slack in the system.
 
JOHN WINGER: And I guess I would echo a lot of what Susan said. I mean, we'll peel the onion back on the balance sheet to make sure we understand what the asset composition is, what the liability composition is, to make sure that however they're trying to fund a merger and acquisition, it aligns with the assets that they're actually going to acquire or already have from a diversity perspective too.

We've dealt with a lot of different large producers. And what I've seen when they decide to do mergers and acquisitions is do I acquire more land adjacent to where I am? Or do I go somewhere else and acquire land or rent land to be productive on that land? So we really look at, OK, are you really diversifying your operation in a manner such that you're reducing the risk of some catastrophic event isolated to one local area?

So we try to take all of those things that Susan described, and we apply the thought process, because it's cash flow that pays the bills. And we also delve into, OK, so what's the depth of management here? Do you have good farm managers in wherever you're making that investment? Or are you looking for them? So it's like, how mature are they in that thought process to make sure that they are going to be able to do what they think they're going to do?
 
SUSAN WHITSON: Just a comment from me on availability and input structure for the financing. One of the things I look, as margins become tighter and the inputs become more expensive, and there's even been some availability on particularly seed and fertilizer. It's not been as consistent as we always expect from year to year. It's just knowing that payment needs to be earlier. It's becoming early. I will say, I've been in banking long enough that the farm inputs were always due on June 15 every year after you had it all in the ground. And now it's like, oh, by December, by December.

And I had one farmer tell me, he goes, I had somebody out to my farm in August wanting to know if I wanted to buy this fungicide for next year. And he goes, I don't know. I haven't harvested my crop yet. I don't know how it performed. And you want me to commit and pay now? It's just not working for me as a farmer. So it's trying to understand that.

And then when the input financing is there is to understand how much of that cost, is being underwritten by the vendor wanting to sell more product versus the price that's in there and kind of where's your net gain. Do I finance it here or there? To understand where some of that pricing difference is for what they may be able to get. So there's a lot put on the producers just for every single thing that they're doing for inputs to understand where's the real value for them. So that to me is kind of one of the challenges that's there right now.
 
NATE KAUFFMAN: Yeah. And that ultimately does come back to what the producer perceives as being value.
 
DAVID HARDIN: Susan, I would echo that in just that it feels like a shell game sometimes, but you're exactly right. The suppliers are wanting commitments sooner and sooner. So not necessarily our situation, but a lot of times producers are trying to maximize the highest level of discount they can get.

Well, if they're not in a situation where they can pay cash, where they're having to finance, then they might end up in that split line that you're talking about where they would use their Farm Credit line of financing to secure that 8%, 9% discount. And then as soon as that crop is in the bin, then they can take out a CCC loan at a lower rate to pay off your Farm Credit line.
 
SUSAN WHITSON: Yeah. Some of times it's not what you saved. It's what you spent. [LAUGHS]
 
NATE KAUFFMAN: We're going to pause. I'll look and see what questions anyone here from the group might have. And if you could maybe also just say your name and organization so everyone on the panel knows too. Go ahead.
 
AUDIENCE: Kyle McMahon, the CEO of Tractor Zoom. How are you best using technology in your loan origination on farm inputs at your financial institutions?
 
NATE KAUFFMAN: I suspected this was a question that we're going to get to, and so I appreciate you asking the question of how you're thinking about technology and originating loans. Anyone want to take a first stab?
 
MICHAEL GUNDERSON: You want to start?
 
JOHN WINGER: I can start. Of course, you heard the words see and spray today. You've heard the word subscriptions or licenses.

And of course, you've heard me say we're a captive finance company. Since we're a captive finance company, we have to be creative in the way that we actually try to finance that technology, whether it's the hardware that actually goes on the sprayer, or if it's the subscription that's embedded in the actual technology on the sprayer.

So we're taking kind of a two pronged approach where, hey, we're willing to finance the hardware. But then there's the software and the license, and we'll go ahead and we'll also finance that. But it's going to be on different terms than the equipment piece of the transaction. And what's that Liberty Insurance commercial. You pay for what you get or you get what you pay for. Essentially, what we're trying to do is say your license subscription is tied to how much you actually apply in the field. And so we're going to charge you no more than what you actually use.

And then we'll put that-- we've just to get the adoption rate up, we've tried to basically put what we call harvest terms on that where we'll say, even though we're saying you pay for what you use, we're saying but we're trying to get people to adopt it. So we're going to basically ask you to pay for it after harvest when you get the money in, or you can pay for it now if you want.

If you want to leverage that line of credit that Susan's extending you to pay for it, we're happy to take that payment as well. So we're just trying to find different ways to get the adoption rate up for that particular technology. And we're relying on other lenders. We're relying on ourselves to come to the table and try to find that solution. Did that help, Kyle?
 
MICHAEL GUNDERSON: I suspect one of your biggest competitors is Ag Direct, which is a Farm Credit collaboration out of Omaha, out of the Farm Credit Services of America. And that's a highly automated process, I think, very little human interaction in that. It is at point of sale. There is some, like your team, there is a small team of analysts that underwrite those biggest credits, but I think it's a very highly automated process.

And we have, obviously, members in our territory, our own borrowers that use that product. But we also have some members that say, I don't want that technology. I want to run this purchasing decision about a piece of equipment, a very large, expensive piece of equipment, by somebody with some insight into how to manage that asset on the balance sheet. And so in some cases, we have producers that forego or even shun the technology because they would prefer to have that interaction with a person as they make that decision.
 
NATE KAUFFMAN: Great question. Other questions? Yeah.
 
AUDIENCE: So I spent some time farming and it seemed like sometimes the credit industry was happy to appease my bad record keeping whenever I was submitting my financial documents. And just they accommodated my lack of record keeping. And so now in the work I do, sometimes I think, well, I was probably just paying a little too much for loans. Have you ever thought about in the idea that you could incentivize borrowers with keeping good records with a discount and that they would know? Because I think my experience with farmers is that, man, they love a little lower rate.
 
SUSAN WHITSON: That's exactly how we started in the early '90s, coming out of the '80s. Bring in your completed balance sheet dated December 31st of each year. We're going to give you-- at that time, rates were high enough that 1/4% or 1/2% discount made some sense. Balance sheet, income statement, 1/2% off your rate. And that really definitely created a lot of adoption pretty quickly, probably back at a time where that wasn't as common as it once was.

But takes some work on our part to make that happen and to work with the producers to know that, when you bring that balance sheet in, well, let's work with it and let's help you. If you're not, like you said, that's not my-- I'm in farming to be farming, not to be record keeping. And so how can we help you with the other side of that too?
And sometimes actually there's been-- probably it's a little harder to find accountants now too than it was before. And so that's probably a different issue. But it's being able to find those partners that can help you there too.
 
JOHN WINGER: And what I will say is it's not necessarily the interest rate that we're letting influence our decision or the good records that we get in. It's actually trying to personalize the solution or the financing structure. So if you give us good information and you say, I want this type of amortization period and I want to pay on this frequency, you're more likely to get a positive response from us if you've got a solid reporting regimen. If you don't, then we're going to say there must be some hidden risk there. And as a result, we're going to tighten the structure up a bit, so that we're compensating for what we think is risk, which may or may not be the case.

NATE KAUFFMAN: David, I don't to make any assumptions that Excel is the reason that you got into agriculture and farming. But I'm curious, and on that question, what, if anything, have you changed as it relates to documentation and things that you're generally preparing when it comes to credit?
 
DAVID HARDIN: When it started out, it was the old longhand ag rural development hand worksheet, which I find odd, because before I came back to the family farm, I had done financial records for farmers for a livestock feed company on a quarterly basis, doing modified P&Ls for them. And I used to gripe about how poor some of the record keeping was. It was literally receipts in a shoebox handed to me.

And here once I got into it, to Susan's point, I got into this to farm, not to actually do record keeping. It became a little more clear to me why I was seeing some of that. But now, I mean, we've evolved and keep our records on a-- not that I'm plugging for anybody here, but a company called Uncommon Farms and they're using their financial record keeping software.

It's easily tailorable to both our grain farming and the livestock side of the operations. So we can run them as distinct enterprises and make sure that we're seeing, how do I want to put this, basically treating them both as independent. So that way in bad times, one's not subsidizing another.

And I think it's helped me to be more granular, especially with some of what I would consider some of our-- be able to drill down and look at cost per acre on not just our best ground, but also our more marginal ground that are places where we're probably really looking at tightening the screws down as margins decrease.
 
NATE KAUFFMAN: Questions? Yeah, Brian.
 
AUDIENCE: So worked on a recent research project looking a little bit more into vendor financing and non-real estate financing. And it was primarily motivated by the fact that USDA just doesn't do a really good job of tracking some of that. We went through a period where at the 0 bound, farm equipment was going up, yet USDA was reporting that debt on the balance sheet was actually decreasing. And kind of found that a little bit hard to believe. So we did a little bit of work and were able to show through farm equipment liens that, yes, there is some misreporting.

So I'm curious of the period of time we're in right now where we have depressed margins. Interest rates are higher. How is vendor financing going to be going forward? From a demand perspective, for John and David, what do you see going forward for demand. from Farmers for the vendor financing? And then for Mike and Susan, how does that affect you all from a competitive standpoint, like for competing for loans. So kind of a two part on the future of vendor financing.
 
NATE KAUFFMAN: John, you want to take that one first?
 
JOHN WINGER: Sure. I'll try. Great question, Brian. So as you know, John Deere has a dealer network out there that are basically interacting with their customers every single day. And when they interact with their customers, they're trying to get a commitment to do I want to buy new equipment? And if they want to buy new equipment, then they put the order in at the John Deere factory and call it a retail sold order.

And of course, you know that we hit the pandemic and there was the supply chain disruptions. And as a result, the backlog started growing. And we couldn't satisfy a lot of the demand for the equipment. And of course, we were in a position where we believe farmers wanted to replace their equipment because they generally hold the equipment for three years and then they upgrade to a new piece of equipment with the latest and greatest technology.

So now we're facing the economic headwinds. There's less supply chain disruptions. And as a result, of course, you got inflation and you got the higher interest rates. And now that we know the demand is lower. So if you look at that backlog in the retail sold orders in our factories, we're saying, yeah, we're nowhere where we were in the past, and so we need to adjust.

And if you've heard our recent earnings call, Corey Reed described this for whoever was listening to the earnings call was, hey, we're trying to actually control inventory levels right now so that we don't have a whipsaw type situation where the dealers, ourselves, and the customers are experiencing a devaluation and equipment. So we're trying to control the front end, the new equipment, in a way that is equal to or less than what we believe the demand is.

Now, from a financing perspective, I can tell you, I monitor the number of requests coming in on a daily basis. And what we're seeing is exactly what everybody is saying. We're going to hold off on purchasing new equipment or getting financing to purchase new equipment until we feel more comfortable that we have our house in order. Like what's the economic cycle look like? So that then we can make a more conscious decision about a more economic conscious decision about making an investment in the new equipment.
 
And of course, people that have one-year-old equipment that are expecting a new piece of equipment. Well, we're seeing a lot of that kind of dissipate. And so that used equipment market is also impacted by all of this. Now it's just a matter of getting through the cycle and staying calm, but also making sure that there's not a huge whiplash or what I would call just a, you look on a curve, if it goes down immediately, then nobody's a winner.

And so we're trying to just make sure that it's a soft landing, as the Fed would say. We're trying to make it--

NATE KAUFFMAN: Well done, John. I'll come back to your comment there and be curious on your thoughts of what the duration of that cycle will be. But Mike or Susan, any comments on vendor finance?
 
MICHAEL GUNDERSON: Well, I'll just say that we have vendor finance as part of the Farm Credit system. So we own pro partners, which just like you guys do with retailers to do point of sale. I think we have members that, again, they use that and find it very valuable, very convenient, ease of doing business. And oftentimes it's subsidized, because the vendor wants to make a sale.

So I think many of our members understand that's a very specific and tailored vehicle for borrowing. And if you want to protect your liquidity more broadly, understanding a revolving line of credit and borrowing with us rather than being locked in with that vendor, that provides you some flexibility. And we have producers that value that.
So I mean, it's going to be harder going forward. I think the whole market is going to be more competitive. But I think for a lot of our producers, we bring value by looking at the whole picture, not just that one particular need at planting time.
 
SUSAN WHITSON: I was going to say one thing that we've been seeing a little bit more of. It's not so much changes in our financing. It's always trying to figure out, as you refer to, the shell game of what's the discount versus the real cost to me. But we've also been seeing some producers going together as a producer group to be able to buy direct, to be able to get enough volume, which kind of sidesteps some of the other pieces of it to be able to get to I want a better cost for my inputs, and I can finance directly from there.

So that's a different direction. We see a lot of equipment LLC's that have been in place for quite a while, to be able to get enough acres under a specialized piece of equipment. But we're starting to see it more on the input side too.
 
NATE KAUFFMAN: David, anything?
 
DAVID HARDIN: I would say on the quick consumables crop input side, I've definitely seen the Bares or the Cortevas of the world are trying to attract people or attract customers in so they can lock in their sales. Because as John pointed out, they're trying to rightsize their inventory and make sure their reports to the street don't cause people to be running for the hills. And so they're putting out, well, not 0. They're attractive compared to other rates for lines of credit that are out there.

On the intermediate expenses, like these pieces of equipment, I think you're seeing because of the downturn or the perceived downturn right now, you've got the types of folks that are replacing stuff and using those lines of credit are the people that their timing in the cycle didn't work out quite right. So now they've got a piece of equipment that is worn out and has to be replaced.
 
And they don't have the cash, so they are going to borrow it. And then you've got folks that are in probably a little better financial standing, but they're looking to keep their powder dry, keep that working capital there. So they're going ahead and financing that purchase, even though they might have the cash on hand to be able to take that purchase on right now.
 
MICHAEL GUNDERSON: I think David makes a really good point the biggest competitor for borrowing on lines of credit from 2002 to 2003 was cash. Not any lender, but just farmers flush with cash. And so we ended the 2023 marketing year, 2023, '24 marketing year, with the lowest utilization on revolving lines of credit ever. And I mean, the reality is that as margins get tighter, that cash buffer is going to go down, and our biggest competition is probably going to dwindle to some extent.
 
NATE KAUFFMAN: Pick up that thread in a second, but I'll see if there's other questions that anyone else may have. Got a little bit of time left. So Mike, to your point there on cash, and John, you alluded to this a little bit in terms of a potential cycle.

Five years ago in agriculture, we were talking about there being some financial stress in agriculture. We were seeing modest increases in defaults on loans to some extent, some bankruptcies, particularly dairy, but those portions of the industry that were maybe most stressed. And then we went through a period of the pandemic, Mike, kind of like what you just described, where there was a tremendous amount of cash ultimately to help producers finance what they needed for their operations from one year to the next.

And now we're in this period again, at least it seems we have been for about the past year or so, where margins are tighter. USDA, again, their report that would show something similar of a decline in income. And that most pronounced where we sit here in the Midwest as it relates to grain farms. So I would be curious your thoughts.

And this is maybe a bit more general than just a discussion on inputs, but your thoughts on the financial picture of agriculture, and to what extent do you have concerns that a year from now, how will we be talking about this nature of financial stress, and what do you expect to see? What are some of the things that you think about and how worried should we be? And I'll see anyone that wants to go first and offer a clean slate on the topics for discussion.
 
MICHAEL GUNDERSON: Go ahead.
 
NATE KAUFFMAN: John?
 
JOHN WINGER: Sure. So like any cycle, and clearly we're monitoring the past dues in our portfolio. We're listening to our customers that are past due that are saying, I need assistance. And because there has been a deterioration in working capital, I think what we're going to see going into 2025 is potentially some more customers in a carryover debt situation. That's not the end of the Earth, because we know we're in a cycle.
 
So we'll have to work with those customers on that carryover debt piece. How quickly can they pay it back? What are their plans to make sure that they're able to weather the storm? Is it selling land? Is it adopting the new technology to reduce their costs so going forward they become more profitable? I mean, it's those kinds of conversations we need to have to make sure that it's not the same old, same old. You're not waiting or you're not using hope as your strategy. You're actually doing something about what just took place and the condition of your balance sheet.

So clearly, we've been in the business for a really long time and will continue to have those conversations to try to help farmers that have a good plan succeed.
 
NATE KAUFFMAN: Hope is a good thing, just not as the title of a business plan.

[LAUGHTER]
 
MICHAEL GUNDERSON: Yeah, I think we're pretty optimistic about the future of the farm economy. I think our colleague from ERS highlighted some of the decline in net farm income, but that decline is back to a more normal level, a more average level, not the peaks that we saw. So I don't feel like we are going to-- I mean, will there be some stress in our portfolio? Yes, of course. But I think it's not going to be a collapse of the farm economy around grains that previous generations have experienced.

So now the reality of the situation is that the market's goal is to put the average producer out of business. So we're going to see, as a result of that reversion to the mean, some people that made bad decisions have to reevaluate those decisions. And then are they willing to work through that set of bad decisions they made?

And I think Farm Credit learned some important lessons in the farm financial crisis to say we have to help producers weather that storm. And some of them are going to have the wherewithal to do that, and some of them aren't. And we're going to have to help them find either a different lender or a different path for them.
 
SUSAN WHITSON: Just a couple comments on my part is when you're looking at lending and you mentioned how low they got, they're definitely on the opposite side. There's still a handful of people with '23 grain inventory, I'll admit. [LAUGHS] He's laughing down there. Because the prices were going to get better and they didn't. And you've got '24 crop that is now out of the field but is often still financed. And we're starting it. We're already prepaying for '25 inputs.

So when you start to look at there's three years that are probably in process and making sure you're still knowing what's each piece of that, and to be able to manage that is trying to help work through that. Just some initial indications. Yields were a little all over the place, kind of depending on what weather was, generally a little
better than what was expected. But there were some areas that got hit by some hard flooding. Northwest Iowa as a part of that.

I did call a banker up there before this, just to say what's it really looking like in your area. And it was pretty similar to us. And what we're seeing is we've only seen a small percentage of our balance sheets kind of looking at what we're looking at right now. And they are generally OK. There's a handful that are probably on that weaker side that is probably typically true, that 80/20 rule. It's probably that 20%.
 
One area that we're seeing the weakness in is really somebody who's not been in farming that long. So they had more rented ground. They had higher debt levels. They didn't have as much to fall back on. And so to me, it's that concern for the beginning farmer. And when we're looking at success in agriculture long term, how can we keep some of those in the business and going? So that's probably a weak spot in our part is that beginning farmer.
 
NATE KAUFFMAN: I'll ask one more question, and I want to make sure to leave some time for our wrap up comments here in just a minute. But this is a conference that, David, you can correct me if I've got the math wrong, that's been hosted, I think, for the past 20 years as it relates to agriculture in the Midwest.

Agriculture has gone through some pretty tremendous changes over the past five years. If we were to repeat this conference next year and be thinking about some topics that might come to mind, what topics do you think would be most relevant for us to want to be paying attention to? Anyone want to chime in on that?
 
JOHN WINGER: Well, I have to commend the speakers today, because I think all of their information was very relevant to what I think we need to focus on in the future. So the technology adoption, the mergers and acquisitions, whether it's cooperatives or whether it's farmers. I think that's going to be important. And then how are the banking or finance community feeling about directionally where all of that has taken us?

And Brian made a really good comment and I haven't really thought deeply about this, but if you use [INAUDIBLE] spraying, you reduce the chemical application costs by up to 60%. How does that impact the manufacturers? So that might be another piece to bring into the conversation is how is [INAUDIBLE] feeling about all of this.
 
NATE KAUFFMAN: So yeah, good point. Anyone else?
 
MICHAEL GUNDERSON: I think particularly in Southern Illinois, we're going to put a crop in in February or in March, April, May. And we probably won't have a new farm bill done. And so what is the change in policy? What does a completely Republican controlled government look like for farmers in the fall of '25? And how do producers maybe reassess their operations in light of that new regime?
 
NATE KAUFFMAN: Yeah. Good comment. Policy.
 
DAVID HARDIN: For me, it would be just trade policy and focus on end users for what the majority of us in the Midwest produce.

Your corn, soy, wheat, and then the animal protein products. I know I don't farm the same crop mix that my grandfather did. There are some farms that I have that USDA says still has an oat base on it. Now, if President- elect Trump puts a big tariffs on imported Canadian oats, maybe it'll make sense for me to grow oats again at some point in time.
But we've built up a market chain and an infrastructure to produce a set number of products. And because of things beyond the control of even any of us in this room, those no longer make sense to produce. We've got a pretty big upset in the farm economy at that point.
 
NATE KAUFFMAN: Susan, any final words?
 
SUSAN WHITSON: I'm just going to echo some of the things that they've all brought up, particularly David, because if the producers are successful, that's where we're all successful because of it. And I think our rural economies in particular will be highly dependent on the success of producers.
 
NATE KAUFFMAN: Yeah. And it's obviously a very difficult question to answer at this point, because there are large number of potential risks, and it has been a bit of an inflection point here over the past year or so with respect to the ag economy.

I want to take a chance to quickly Thank the panel here for the discussion, comments. I think a lot of good thoughts from a variety of perspectives. So if everybody could join me in thanking the panel today.