ABA Banking Journal - August 2007 - (Page 52)

briefing The Economy BY MICHAEL J. SWANSON agricultural economist, Wells Fargo, Minneapolis The bad and good of ag price volatility THE OUTLOOK FOR AGRICULtural commodity prices remains bullish thanks to the competition from the energy sector. The dual use for corn as a food and fuel has pumped a whole new demand stream into agriculture. Further, the increasing value for corn has pushed all row crops to fight for acreage around the globe with higher prices. At the same time, robust global economic growth is increasing food demand. With agricultural prices up, producers have started to look at expansion and increased financing. In the U.S., summer heat and dryness have raised the usual concerns about production. The combination of strong demand growth and production uncertainty has increased price volatility in every segment of agriculture. This represents both an opportunity and a problem for lenders. The problem is that agricultural producers followed lenders’ advice and pre-sold some of their expected production. Unfortunately, the subsequent price rally has pushed them to make margin calls on those sales. While it is profitable to extend them credit on those margin calls, credit officers worry about the risk of a crop that has not been harvested. This is a good time to review the producer’s risk management options. If the pre-sales are protected by crop revenue coverage (CRC) or revenue assurance (RA) crop insurance, the credit officer can worry about something else but can rest easy on the marketing plan. The most financially valuable aspect of CRC and RA with the 52 AUGUST 2007/ABA BANKING JOURNAL harvest options are the built-in call options. This component is one of the least understood aspects of crop insurance. With the spring price of CRC corn at $4.06/bushel, if the fall price was to run up to $4.50/bushel on a short crop, any producer who suffered a production loss would be able to collect at the higher price. This would allow them to meet their margin calls. On the other hand, lenders who are working with producers who chose simple multi-peril or group risk cannot rest as easy. The current situation that a producer’s individual revenue will not mirror the county’s activity and/or the market’s upswing. This means that a producer’s marketing plan and its crop insurance payments could diverge leaving them exposed on their presales. At this point, there is not a lot that bankers can do to change a producer insurance profile, but it represents a great opportunity for advising about next year. Most producers are more receptive to listening when they feel the pain from their desire to minimize $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 The swings get bigger U.S. cash corn prices May 17 May 27 May 37 May 47 May 57 May 67 May 77 May 87 May 97 May 07 Source: USDA WF Ag Economics illustrates the biggest difference between the crop revenue plans and others. The simple multi-peril insurance will cover them for any losses at the pre-established price, but if the market runs up on national shortfall, they will be out the difference. The risk of the group insurance plans is insurance premiums. Agricultural producers, like everyone else, like to the focus on the upside, but when prices are moving up and down rapidly and weather conditions are uncertain, they will certainly discuss products that can remove the downside to pre-selling in a volatile market. BJ www.ababj.com/subscribe.html http://www.ababj.com/subscribe.html

Table of Contents Feed for the Digital Edition of ABA Banking Journal - August 2007

Contents Editor's Column The Unbankers Snapshot: Do Share Repurchases Signal More M&A Activity Sleight of Mind Goals Behind Proposed ABA/ACB Merger ABA Resources ABA Chairman's Position Should You Sell Those Nonperformers Pass the Aspirin Branch Design - Evoking a Sense of Place Two Banks Take the LEED Move Over, Buddy Service Feature: Bankers' Banks Directory Websites: What's State of the Art for Banks? Citi Mobile to Go Strong with iPhone? Date First, Marry Later Mailbox Banker's Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - August 2007

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