One Country Project's Hot Dish

Heidi:
Welcome to The Hot Dish: Comfort Food for Rural America. Well, we're no strangers to the challenge of living in a rural economy, but we brought in two really smart guests to give a further picture of the bigger forces at play. I spoke to Brad Nordholm, the president and CEO of Farmer Mac about how the farm economy is doing, and later in the show, Joel will talk to a climate scientist about extreme heat and what it's doing to our crops and potentially the availability and price of food.

Joel:
So let's get started.

Heidi:
Joel, I sent you a study recently that the last two years, there has been record net farm income. And I think if you talk to farmers, they wouldn't tell you that's true. Maybe they're hiding it. Maybe they're thinking that if they tell everybody how well they're doing, they won't be able to complain too much. I don't know. But it seems like that's not reflected in how they're looking at the economy generally. Why do you think that is?

Joel:
The reason I think that they're doing so well is because of some of the things that they've done themselves. I mean, you look at the ethanol plants, you look at the biodiesel plants, they control more of where they sell their product to. You look at the grain leg systems that are on each farm, they're bigger than the elevators when you and I were growing up. And so farmers got to that point where they market way better than what they've ever marketed before. And so because of that, they sell better than they've ever sold before. You take the average farmer now, they have 30% to 35% of their crops sold before it ever goes in the ground.

Heidi:
Well, not only that, but if you think about the west and you think about the further you went west, the more you saw small grains. Now you see corn and soybeans where you've never seen corn and soybeans. They're more drought resistant. The varieties allow for different soils and still be productive. So I think there's been a lot, like you said, there's been a lot of innovation and there's been a lot of willingness to try new things on behalf of American agriculture, but I think you and I can both agree that farming isn't the only part of the rural economy, and so there are parts which are being more and more challenged and challenged by the fact that fewer and fewer people live in rural America. The kind of image that maybe we had when I graduated from high school is not how America is going to look in 10 years or even in five years. And so it's time to kind of think about how we embrace change, but keep what's good about living in rural America.

Joel:
You bet. And that's what The Hot Dish is all about.

Heidi:
Brad Nordholm is the president and CEO of Farmer Mac. That's the nation's largest secondary market for agricultural real estate mortgages. Farmer Mac aims to increase the availability and affordability of credit for people working in the agricultural industry and living in rural America. Brad's going to talk about the challenges of high interest rates right now and what farmers are talking about out there, but before we get into the nuts and bolts of what the economy looks like today and what we expect the economy is going to look like in a couple of years, Brad, can you just explain what Farmer Mac is?

Brad Nordholm:
Heidi, well, first of all, thank you so much for having me on. Farmer Mac, as you noted, is the nation's largest secondary market for agricultural loans. Now that sounds rather abstract. It's really quite simple. We are an organization that is solely focused on increasing the availability and efficiency of credit delivery to rural America, to farmers, ranchers, agribusinesses, rural infrastructure organizations, and we do that by being a reliable, consistently available purchaser of loans, mortgage loans from farmers and ranchers from banks, insurance companies, local finance organizations, farm credit institutions so that they have the funds to continue to serve their local customers.

Heidi:
I think sometimes we think about ag lending and we think about the big institutions, big banks who can in fact carry that risk. But those small community banks are the bedrock of rural communities. They're the ones that put the ad in the flyer for the football team and to keep them in the business of ag lending, there has to be an institution that's willing to share some of that risk. But let's talk about what that risk is today, Brad. We have enjoyed, as I like to say, free money for a long time. When your interest rate is actually lower than your inflation rate, that pretty much tells you you've got free money, right? But now we are not in that situation. As we see, the Fed basically pursuing policies that raises the interest rate. How is that stressing the rural economy?

Brad Nordholm:
Well, it is. Let me just give you a couple of numbers. For a farmer rancher that is undergoing a million dollar expansion, maybe additional storage, maybe additional irrigation systems, maybe buying land that's been available, come available from their operation for the first time in a generation. That million dollar capital investment and borrowing a million dollars today is going to result in higher interest payments of about $300,000 to $350,000 over the life of the loan because of the higher interest rates that we've seen beginning in April of 2022 and through today, and the outlook for the next six months is that we may see the Fed increase rates maybe one more time, possibly two, but that they will probably stay higher through the remainder of 2024. So you think about that additional interest expense for that farmer or rancher, and it's coming right out of existing cash flows that are available today. It has an effect of decrease in capital investment and pinching net farm income.

Heidi:
There's no doubt about it. Interest rates are huge component of the balance sheet and profitability, and we are now in an unprecedented, for a lot of young farmers especially, an unprecedented interest rate challenge that they haven't experienced before. How does Farmer Mac help weather that storm and what advice would you have to farmers out there who are looking at making investments if they're looking at some way to decrease the cost of capital, but increase their access to capital?

Brad Nordholm:
Yeah. Well, you make a very good point about the young farmer. At Farmer Mac, over 50% of the loans that we purchase for farmers and ranchers are to what are classified as small farmers with revenues of under $350,000 a year. More than 90% of our loans are to farmers that are classified as family farms. Let's face it, every single farm operation is different. And so what we see are those farmers who are drawing on the best of what has made that farm successful in the past, and also having an openness to new technologies and new methods. They're the ones that are able to squeeze a little extra, not just necessarily yield, but profitability because it may be possible to increase profitability without increasing yields by reducing input expenses.

Heidi:
We just saw an extension of the 18 Farm Bill. It's not likely that we're going to see in the next couple of months of farm bill pass the United States Congress. How critical is the farm bill and the certainty of passing a farm bill to making sure that we have shared risk for American farmers?

Brad Nordholm:
Probably the number one area of focus and concern that we hear right now is a continuation of federal crop insurance programs, absolutely critical to American agriculture. So that's something we're very much on the sidelines and insuring for. Is it released to Farmer Mac? Yes, we were created by Congressional Authorization. We have a congressional charter. Any changes to that charter would most likely be made in a farm bill. Our charter goes back 35 years ago. Who has a business that hasn't changed in 35 years? Rural America has changed. 35 years ago, we weren't talking about the essential nature of broadband. We weren't talking about precision agriculture. We weren't talking about the importance of telecom and broadband linked together. We weren't talking about many things. And so just as rural America and agriculture changes, Farmer Mac also needs to change.

Heidi:
But put your hat on and look into the future on commodity prices. How does interest rate challenges, how does maybe trade challenges, how is that affecting as you see commodity prices going into the future?

Brad Nordholm:
It's really interesting to think about what happened during the pandemic because we had some commodity prices that doubled or even tripled during those years, and you think, well, gee, that must be just a windfall. But of course what was happening is that many of the input costs were also increasing, and while the net result during that period of time, 2021, 2022, 2023, as you know, it looks pretty good, was on average record net farm income. Put yourself at the kitchen table with a farmer and think about the uncertainty, the unfamiliarity with having such extreme volatility in both commodity and input prices. Just looking at the headline number of high commodity prices, doesn't reflect what I think is uncertainty and anxiety that a lot of people were feeling at the same time that the net result was record net farm income.
There are a couple of other things that are really kind of unprecedented right now as well. You talk about interest rates, that also contributes to a strong dollar. A strong dollar contributes to decreased exports, and you look at the combination of decreased exports and consumer demand, and we have a situation right now where really for the first time in about 60 years, we are net importers, not exporters of agricultural commodities. So you put all that together and I think going into 2024 with continuation of inflation, net farm income is down a bit. There's probably going to be a little bit more conservatism in the expansion of farm operations. Continue focus on operational excellence, and I think that it's likely we're going to see slow down and maybe even a slight reversal in land price increases because the relationship between what it costs to carry land, the return on land and the price of land right now is really approaching record high levels.

Heidi:
Even in North Dakota, only 25% of agricultural land is farmed by somebody who owns the land. We are getting further and further away from this notion that this is grandpa and grandma or mom and dad. They have two sections of land and they farm it themselves and they own it. That's not really the model that we're seeing. How has these changes in land ownership, how has that affected lending and how has that affected how you look at Farmer Mac at the future of agriculture?

Brad Nordholm:
It's such a critical question. I think the foreign ownership, particularly in the Upper Midwest, there's probably more concern than there is the reality of the scale of it. But the landowner being separated from the operator of the farm is an issue. And from the standpoint of someone who extends credit such as ourselves, we see the good operation, we see the credit worthiness of the operation, but I think about it from the standpoint of just being an American citizen and kind of that social fabric of what happens when you separate the ownership from the operation of the farm. We have regular conversations and discussions about creative ways that we can encourage the next generation, and it'd be great to see that also encouraged in other types of federal policy, and I'm thinking specifically of tax policy that would make it easier to transfer with recognition of the equivalent of a step-up basis to the next generation earlier on.

Heidi:
I want to close by asking you about the sustainability movement. Obviously regenerative agriculture, agriculture that's sensitive to soil. Are you seeing a lot of that in your credit? Are you doing any kind of work with various extension services to talk about sustainability of soils and what that looks like going forward?

Brad Nordholm:
Well, first of all, I think we all recognize that soil health is a very, very important matter in productive American agriculture. The healthier the soil, the greater the water absorption, the greater mineral that can be transferred into crop production, the ability to reduce use of fertilizers, some insecticides and herbicides. And so soil health is of strong concern to everyone. With regenerative agriculture, we really don't have a good definition of what that means yet. And what I keep telling everyone is that there are many different farming practices as there are farmers and farms, and we need to respect that farmers need to make decisions based on local conditions, weather, soil, and other conditions.
On the other hand, we are seeing increasing adaptation of different types of regenerative practices, beginning with cover dropping, beginning with precision agriculture, reducing the use of inputs, applying them more precisely as examples. That's leading to improved soil health. That is leading in some many cases to improve profitability. That's why farmers make that choice. And so we see that as very positive. Farmer Mac is here able to respond to the results that those people are delivering from being creative, as I was saying at the beginning of the program, with their farms, because that increases their credit capacity. That increases their ability to expand and grow. And so we don't advocate for any one size fits all policies that should be left to local state and federal government officials and policymakers, but we do respond to them and the results they get from it.

Heidi:
Thank you, Brad, so much for joining us and congratulations in heading up an organization that is so critical to keeping small farmers in the business and providing credit to rural America.

Brad Nordholm:
Well, thank you very much. That is why we are here. That is our mission. We're very clear about it.

Joel:
It's really been one of those summers, a lot of farmers are starting to pay attention to what long-term is happening, which is heat, a lot of heat and not the moisture that they're looking for. Some of the soybeans are coming off the field and what normally would've been a 60 bushel crop or 70 bushel crop is coming in at 30 bushel. Well, that's a reality, and it's got major implications for communities across the U.S. Dr. Mason Fried is a climate scientist with the Climate Center of ICF, an advisory company that has new climate models to project how hotter the U.S. will get by 2050. Dr. Fried, good to have you on The Hot Dish.

Dr. Mason Fried:
It's great to be here.

Joel:
Talk to me about what your study shows. Talk to me about where you think we're heading.

Dr. Mason Fried:
Yeah. Well, we're at this inflection point right now, where we just had a really hot summer, and these summers are starting to add up. It's getting hotter. There's heavier precipitation. We have new data at our fingertips to give a better view of the future, how these things could worsen in the future. The new data that we have is showing the potential for continued and worsening extreme heat across the United States, particularly in areas where agricultural productivity is very important. Places like Plains, Central Valley and California and Texas.

Joel:
I live around individuals that have been climate change deniers for a long, long time, and they hit me with some things on my talk show that I have to be prepared to answer. One of the things that they constantly hit me with is this is just a cycle. We're coming off a wet cycle here in the Upper Plains, and now we're going into a dry cycle and it's bound to get warm and it'll cycle back again. What would your answer to them on that be?

Dr. Mason Fried:
Well, I'd say that there are natural cycles, but those natural cycles are superimposed on top of long-term trends that happen over more than a year, more than a season, more than a year. These are trends that occur over centuries or thousands of years. And the long-term trend, of course, is showing warming. That's what projections are showing into the future. You can still have a particularly hot summer like this past summer that might've been, or well, certainly was influenced by El Nino, which is a natural cycle, but again, El Nino will go away in a couple of years, La Nina may replace it, but it's these long-term trends we're most interested in. There are significant economic impacts from climate change nationwide. That's what makes these models and forward-looking projections so useful is it allows us to think about how much worse could these economic impacts come in the future.

Joel:
I'm hearing stories from friends and family in Arizona, Texas, New Mexico, where they've spent the whole summer inside, which to me would be another way of convincing individuals that we might have to do something about this.

Dr. Mason Fried:
Absolutely. Phoenix, this summer... I'm here in Utah, it was hot enough. Although this summer was actually cooler than the past two, but Phoenix, Arizona, New Mexico, Texas had really hot summers. Particularly in areas of the southeast, the heat, the summer heat was compounded by humidity. So the heat index, that feels like temperature, it was really high, and that's affecting outdoor workers, people trying to recreate outside, work outside, but also folks inside if they don't have sufficient AC in factories and other kinds of facilities.

Joel:
In your studies, have you seen that areas where they normally wouldn't complain one bit about it being a little warmer, but where deep down it's really affecting exactly everything they do during the day?

Dr. Mason Fried:
Yeah, it's certainly something we're seeing. There are certain regions which right on that tipping point where in the past growing conditions have been really favorable for a type of crop, for example, and it doesn't take much warming, much change in precipitation to really sort of tip into conditions that are less favorable and that has real tangible impacts on the growing season and productivity.

Joel:
So Dr. Fried last one, I promise. Can we fix this? Is the horse out of the barn and you can't put him back in? Is this thing over? I've heard some experts that live in the world you live in that said, "We needed to do something 20 years ago," that it might've gotten away from us already, but I'm curious what you think. Is this something that we can fix?

Dr. Mason Fried:
Everything we do matters. This is fixable. If there's light at the end of the tunnel, it's that globally, this is a problem that we can tackle. It's just going to take some concentrated effort.

Joel:
Dr. Fried, good to have you on The Hot Dish. Thanks for giving us some time. Appreciate it.

Dr. Mason Fried:
Hey, thanks so much.

Joel:
To learn more about the work of the One Country Project, visit onecountryproject.com. And if you like The Hot Dish or even if you don't, write us a review, we can take it on Apple Podcast or wherever you get your podcast. And to support the important work that the One Country Project is doing, to elevate the needs of rural America in Washington, please visit onecountryproject.com/give. Thank you so much, and we're going to see you in a couple of weeks.

Speaker 5:
Voxtopica.