Bill Watson believes this time is different for agriculture.
Watson, 63, chairman and CEO of UMB Bank, Kansas Region, remembers well the farm foreclosure disaster of the 1980s. And he said there are similarities with today’s rising crop and land prices.
But, he said, the differences are even more striking. And that’s why UMB wants to expand on the $350 million to $400 million it already lends to farmers, ranchers and agricultural businesses.
The Indiana native was president and chief executive of Union National Bank in Wichita in the late 1980s and early 1990s. The bank was acquired by Commerce Bank in 1995. Two years later, he became chief executive of the National Parks Conservation Association. He returned to Wichita in 2005 as president of UMB’s Kansas region.
Why the push to lend more in agriculture?
Banks are awash in cash right now, and the rates being paid on government securities are extraordinarily low, the lowest in my lifetime. We are looking for a home for our money that is safe and can help build our economy and build our economic base in Kansas. Agriculture is certainly one of those areas. Specifically, we’re looking to make loans to agricultural entities for the land, and for the equipment to work and process those crops. … We want to penetrate three groups, really: the primary producers, the farmers and ranchers in the states in which UMB does business, Kansas, Missouri, Oklahoma, Colorado, Nebraska. Second, the processors and co-ops that are buying or processing crops, the flours mills that are using agriculture products. And finally, the suppliers to that industry, those who sell the tractors, the inputs, the chemicals.
What’s so attractive about agriculture?
What we see is an agriculture base that is extraordinarily strong right now. In 2011, they had one of the best years they have ever, ever had; 2012 doesn’t look quite as good as 2011, but in general with the increase in commodity prices, the increase in land prices, the increase in input prices, there is a lot more money flowing through the agricultural channel than there used to be. And when that happens there’s an increased need for money, working capital cycles, those sorts of things.
Some of the markets that we are trying to penetrate, we would share our experience with people. Really, what we do more than anything else is we try to be a team player, especially with primary producers. We try to anticipate their needs, try to help them anticipate what’s going to happen. As you know, agriculture has some incredible risks that aren’t there in other business, not the least of which is the weather.
But aren’t farmers also awash in cash? Why do they need to expand borrowing?
The total amount of credits we see increasing, but not very fast. So, we’re going to have to get a bigger slice of that. That means we have to provide better service, be better than the other guys.
But isn’t there a worry that there is an ag bubble?
Land prices are a hot topic. As you know, I was here in Kansas in the 1980s and witnessed a pretty ugly situation as far as farm foreclosures. The country has gone through a couple big foreclosure cycles and, in some ways, they look like what’s going on now, and in other ways not at all like what’s going on now. …There was a huge ag boom in the teens. Basically, World War I was driving tremendous worldwide demand, and so we had prices for commodities and land prices go up and up. World War I ended and the ground (in Europe) got back into production and prices fell, causing all sorts of heartache. Then fast-forward 60 years to the 1970s when Nixon goes to China and we start opening the international markets, and once again worldwide demand starts climbing and land prices rise. Then there was the Russian grain embargo and rising interest rates and rising commodity prices.
How is this different?
Everyone was overleveraged, then. That’s the difference. The leverage of the American agricultural producer is significantly lower that either of the last two cycles. The reason is because they have been tremendously profitable of late and there is great liquidity in the agricultural system. So people aren’t borrowing every dime they can to buy land as it goes up.
How do you know we just aren’t in the early stages of a bubble?
You‘ll find that a high percentage of the farmers in the ’70s and ’80s were new to the game or who knew they were breaking the rules. They knew they were in the middle of a big-time land play. People today will pay a high price for a quarter or a section where they can be efficient, something they’ve been watching for a while. They know the productivity of the land. They are not jumping out and borrowing the last dime they can borrow, and we are not lending the last dime we can lend. … Another difference is the dramatic increase in the standards of living of people in China and Indonesia and India. They are eating animal protein for dinner once a week rather than once a year. That is a fundamental change.