Listen in as Mike has an important conversation with Aaron Hemmer, SVP-Regional Lending Manager with AgGeorgia Farm Credit, as he talks about current trends and recommendations in lending spinning off of 2019 (aka one of the craziest years in production agriculture).

What you will learn in this episode:

  • Why managing your debt-to-equity or debt-to-income is critical
  • What communication with your lender should look like this year
  • Why liquidity is king in current agricultural markets
  • The importance of knowing and understanding the current market trends in agribusiness

Relevant links:

Listen to the podcast:

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Mike Terning:   Hello. This is Mike Terning. I’m the host of Outstanding in the Field, a podcast by Greenstone Systems. Welcome to another episode. Today I’m excited to introduce a guest that we have. His name is Aaron Hemmer. Aaron, could you please introduce yourself to our listening audience?

Aaron Hemmer:   Sure. Hello everyone, my name is Aaron Hemmer. I currently work for AgGeorgia Farm Credit based in Royston, Georgia. We cover about 79 counties here in the state, but very honored and glad I could join you here today.

Mike:   Great. Well we appreciate your willingness to spend a little time on the podcast with us today Aaron. Just a little more background about you. Where are you from originally and how did you get into the role that you’re in right now?

Aaron:   Yeah, great question. So originally from a small town in South Carolina. It’s called Prosperity, South Carolina. For those of you not familiar with the state, it’s somewhat near the center between Greenville and Columbia, South Carolina off I-26. So grew up there. It’s a community that is heavy in timberland. Got some row crop in the area, some dairies. So I grew up with a little bit of an ag background. My dad had some cows, timberland as well. Left there and went to a small liberal arts college called Presbyterian. Majored in economics as well as music. That will come into play a little bit later in this conversation. Graduated there, went and got a master’s degree, MBA from University of South Carolina.

Really where I was able to cut my teeth in agriculture and credit specifically was at AgFirst Farm Credit Bank located in Columbia, South Carolina. So I started back there. During that period of time, it was kind of the roaring 20s, if you will, of the early 2000s. Everything was going great. The economy was kind of overheated though. So when 07/08/09 came, so came all the crisis. Fortunately I was in a position as a corporate credit analysis where I got exposure to a lot of different transactions that were being participated not only within the farm credit system but also within the overall capital markets as well. So we got to experience the run up of grain. I was the primary analyst for all of the grain elevators that AgFirst had participations in. So pretty much the who’s who that you could think of I got to work on those deals and deal with all of the fun/stress of margin calls.

So through that experience I was able to use several years working the net role and then came over to AgGeorgia Farm Credit. So we cover about 79 counties in the state of Georgia. We work on a lot of the agribusinesses that we’ve got whether it’s feed mill, operations, grain elevators, salt mills. Bits of other types of operations for that matter too. So currently regional lending manager is my role here.

Mike:   Well, great. Thanks for that background. I just have to take one minor rabbit trail here. You mentioned you also majored in music. What kind of music degree do you have?

Aaron:   So it was music general, but at that time I kind of came up in the bluegrass realm. So I started out in a small band. It was a family band and we would travel in and around the middle part of South Carolina. I turned down the drum set and migrated. As another family member came on, I got pushed over to the bass guitar and I’ve got an acoustic guitar. When I ended up going to college, it was really for the scholarship money. I played multiple instruments, sang in different choirs, and it was a good experience. It kind of taught me that there was an art and science to everything. That’s very true in the business world and more specifically in the credit world.

Mike:   Oh, very interesting. My wife was a piano performance major in college, and she got her master’s in it. Both of my children majored in music. So kind of interesting. So.

Aaron:   It’s a great discipline. That’s one of the things—We’ve got three little ones of our own. That’s something that we want to teach them. If nothing else, there’s a lot of discipline that music brings to the table. Also finding where the trends are and being able to anticipate where the next movement is. When you think about music—If you look at finance in general, there’s a lot of movement to it and a lot of patterns. A lot of the best credit people I know have that music background.

Mike:   Oh, very interesting. Well thanks for that little rabbit trail there. I appreciate that. Hopefully my son and daughter will listen to this podcast. Sarah and Joel in case you’re listening, there you go. So anyways. Well, great. Thanks for that background Aaron. So day to day in your role as regional lender, what sort of things do you and your team do?

Aaron:   So my main responsibilities are to go out there and solicit business. If we get the opportunity to make a credit offering, it’s to go out there and do some credit underwriting on them and then also managing the account post close. So it can be anything from structuring a borrowing base for some of our operating loans that we have to working on term loan financing, construction financing, for various large scale or midscale sized projects that are out there. It’s kind of a jack of all trades which is you never know what you do when you come into the office from one day to the next. One of the best things that I enjoy is going out there and helping agriculture in general and helping what I consider to be the hardest working sector within our economy and trying to make the United States a better place to live and work. Then also feed the world as we are the breadbasket of the world.

Mike:   Yep. I too enjoy serving this market. I enjoy the people and their role up their sleeves attitude. So that’s great. So you mentioned 79 counties. Georgia has what 159 counties is it Aaron?

Aaron:   I believe that’s correct.

Mike:   So you handle about half of them it sounds like with your activities. So that’s pretty impressive. So in terms of—And you lend to not only commercial operations but to farmers as well, correct?

Aaron:   Yeah, that’s correct. So we have a lot of producers. If you look at our territory, it’s somewhat irregular shaped. But put a question mark over the state of Georgia and that summarizes it pretty well. So if you look on the very south side that we have, there’s believe it or not a lot of vegetable growers that we have down that way. A lot of pecan operations, a lot of row crop operations that we have. For some of your Midwest listeners, there’s a little bit of a nuance or uniqueness to the southeastern United States where farmers when corn and soybean prices started to go up several years ago, everybody went to beans and corns. They also have the option down here if they want to to plant cotton and peanuts given the climate that we have. A lot of acreage that we have also is irrigated. So if you look throughout our territory, it’s always a unique analysis. It’s a little bit too early at this point of the year to do it, but to see how much of our row crop operators are going to do corn and beans versus peanuts and cotton as well.

Another thing that we see is the timberland and the poultry space. So what it really lends to is not only are we dealing with the corn and the beans being grown but going up the channel from there to the elevators and also to the end user of that grain, which is your poultry integrators. Georgia’s number one in poultry. Gainesville, Georgia I believe is the world capital of poultry. There’s about five or six integrators based there alone. So a lot of corn that is grown throughout the country, the Midwest is hauled down this way to feed the poultry industry that we have. So we’re very fortunate to kind of see the whole ag economy when it comes to grain being grown, being used and seeing the cycles of some of the seasonality that’s employed there.

Mike:   Yeah, very cool. The more time I spend in Georgia the more I realize how diverse agriculture is here. It’s very fun for me to see it being a midwestern guy. So very fun to see the diversity. So it’s not news to our listening audience that we’re kind of in a downcycle here in the ag economy. In terms of a lender, how are you working with some of your customers as some of them struggle with lower farm income or working with farmers who might be experiencing a drop in income, maybe rising debt to income ratios or even debt to equity ratios. Is there anything changing with how you and your teamwork with those folks?

Aaron:   Yeah, there is. Anytime you start to see a little bit more strain within the commodities that they’re working within or within the general ag sector, there’s certainly a little bit more attention that you have to pay. One of the primary things that I want to note to the listeners is communication. Communication with all of the third parties that are out there, it’s critical. So if you’re a grower, you’re working with your lender. You’re working with your local grain elevator. You also want to work with other people in your community whether it’s extension agents if you’ve got FSA. Just open communication, I think, is critical first and foremost.

The second thing is we told people there’s a lot of capital expenditures that people focus on. I know the key thing for a lot of growers or producers that are out there is well, I don’t want to pay taxes. Fortunately where the tax rate is today is a lot better than it has been in the past. I think a lot of people always would say, “Well, I need to buy myself out of a tax obligation.” True, there’s a lot of truth to that. Also you can get yourself in a debt position that makes it a real challenge when the cash flows may not be coming in as they had the past two or three years. So making sure that you can manage your debt-to-equity or debt-to-income is critical. If you have debt and you have it on a shorter term, there’s an opportunity to extend the term out provided the lender of the collateral position is such that it makes that decision prudent. So we have had to work on extending terms with some of our growers that are out there. So they may say, “Hey, this is where our cash flows are.” We say, “Okay, let’s work on that and try to find an acceptable solution.”

Then also coming into the year being conservative. We have a saying that sometimes it’s better to go for a base hit than a home run. When the economy’s tough, making a profit is better than leaving that on the table and risking maybe a higher upside but also a downside too. So live to fight another day is kind of the notion that I think some people have employed for this coming year and something that we embrace. Another one that I would say is when you go into the year, try to set kind of a budget, projection, and goals. That’s one thing going back to communication that would be helpful to the lender. Go into it knowing exactly what you’re going to do. Some acreage may just sit idle this year. It may be the more prudent thing to do. Depending on where your geographic location is and what the local market is, that may be the best option.

Volatility is another option. We are one event away as—It was a week or so ago with all of a sudden crude prices spiked after the issue with Iran. So if you can manage your volatility, that would be a huge thing to do as well. I know a lot of these things are easier said than done, but if you kind of address each of them mentally in your mind or go about and put them into practice, I think that will help a lot of the growers/producers that are out there survive. Also this is one thing that we’ve seen more and more is the popping up of local opportunities. A great example of that is the Lincoln Premium Poultry facility that was set up out in Nebraska. So all of a sudden you have a huge user of grain sitting right there in the background of a lot of grain producers and elevators in the Midwest. Then even here locally in Georgia the same thing’s happening. We’ve got a lot of feed mills popping up here and there. They’re buying local grain from the producers and also from the grain elevators. So always be cognizant of what’s out there in the marketplace. Try to lock in that profit if you can. Again, go for the base hit. You don’t always have to get that homerun.

Mike:   Wow. Well that’s very good insights there. Like you’re saying, national championship game was last night, right. They were both going for touch downs all the time. It seems to be the national champion, all you’ve got to do is win, right? It seems pretty simple, but it’s not easy is it. So these things you’re mentioning with watch your cash flow, be open with your communication, be conservative in your outlook, set the goals, manage volatility, and then keep your eyes open for the opportunities as they come to fruition.

Aaron:   Absolutely. So one of the big things too that we focus on going into any year as far as the producers go is what percentage of their input cost they’re going to finance. So historically if you’re a producer and you’re saying, “Okay, well I need to borrow 50% of my inputs for the coming year.” But then you start to see that number moving up to 60, 65, 70, 75, 80 you know you’ve got a cash flow problem. That’s one of the things and I think a lot of growers can kind of hit the pause button and look at. I know as a lender, a lot of lenders focus in on that number. When it comes to that debt level, make it as manageable as possible that way, like we said, you can just go for another year and maybe the market will turn, and things will be better. Who knows? Maybe we’re one trade announcement away from blue skies opening up.

Mike:   Well, let’s hope we are. In terms of these marketing facilitation payments, how have you seen that work with your clients? What sort of an impact does that have with you?

Aaron:   Well, you know, it’s been a pretty decent impact for the growers that we have to get those payments. It’s one of those things that’s been very beneficial. It’s always a tough time in agriculture when sometimes that’s the thing that makes or breaks you, but I think in this economy with what we’re dealing with it’s just a huge plus. One thing too I will say kudos goes out there to a lot of what the United States Department of Ag has tried to do to help out the farmers. I don’t know if there’s another country in the world that has as many, I won’t say advantages but as a group of folks that tried to put together programs and put together different policies in place to help the farmer out. So I know I for one am grateful for it. Coming from an ag background with my dad doing the farming as well, it’s just a huge plus, I think, for us in the United States.

Mike:   Well, I know earlier last year a lot of your—well some of your pecan growers kind of faced the aftermath of Hurricane Michael. What sort of cash flow constraints did it put on some of those producers and how did you work with them?

Aaron:   Yeah, that’s a great question. So down here in Georgia, Georgia’s always prided itself in being number one in pecans in the United States. Unfortunately when Hurricane Michael came and it was Irma the year before that, both of them kind of made a sucker punch right at the industry with the growers. So for those of you not familiar, pecans are typically harvested somewhere between October and December of each year and there’s different varieties. Depending on where you are in the latitude of the United States you may be harvesting earlier or later. With those hurricanes that came in there, they knocked a significant amount of pecans off the trees.

So as a result of that, I was driving through south central Georgia and worked with one of Georgia’s largest pecan farmers. His orchards were basically nothing but green shelled nuts all across the ground. So there’s a green casing that encompasses the actual nut of the pecan, the hard shell that you normally are accustomed to that’s brown, and they were laying everywhere. So not only did the farmers have to go in there and clean all of those nuts that had fallen that would never ripen appropriately on the tree in order to get in the crop, but then also the crop that they were ultimately left with was not that great of quality either.

Michael, when it came through, that was a real tragedy because it’s one thing to lose your annual revenue in the form of losing that pecan on the tree, but when a storm like that comes through and threes are heavily weighted down because they’ve got all of those nut clusters on each of the winds and the winds whipping at different angles, then that’s where you actually see breakage in the limb. Limbs fall or you see some trees where the roots actually get pulled out of the ground a little bit. So we saw whole orchards that, as a result of that, had to be hedged. Another word for that is trimmed, but the farmers call it hedging. So they go in there and they hedge those trees back. For two years you really don’t get any kind of yield on that tree, at least for the limbs that were cut back. So for those guys, it’s been a tough two/three years. Unfortunately prices were really good when all this happened. But then with the tariff situation that came in there, similar to what we saw with soybeans. There was just an astronomical tariff that China was putting on U.S. pecans. So it’s created a lot of headwind.

But at the same time, going back, there’s some government programs and some insurance programs that are out there that will allow them to survive. It’s really those payments that will keep them going. So we’re optimistic for this coming year to have a decent crop, but it’s not going to be anywhere near what we expect with 100 plus million pounds. It’s going to be down from there just because of the hedging practices that were employed. Also if you go down to southwest Georgia, frankly they just went and bulldozed whole orchards because they were on the ground.

Mike:   Yeah. I drove through there I guess it was the spring of 2019 and it was pretty sad to see some of the devastation. Not only that, it was at some of those orchards that get bulled over, I mean we’re talking five plus years. They were also having a hard time getting new seedlings, right.

Aaron:  Yeah. It’s what we call a generational loss. So the good thing is a lot of our row crop guys, when they lose something it’s only for a year. When you lose a tree, pecan tree typically lasts about 80 years. So you get a seedling and about year seven it’s producing pecans. Ten year 15, it’s really kind of catching it’s own. They can last up to 80 years. So you lose those types of assets, it’s certainly generational loses.

Mike:   Yeah, definitely. I’m sure a lot of sober conversations with some of your customers down in that area took place.

Aaron:   Absolutely.

Mike:   Well, we appreciate you sharing your experience with you here and your advice with our listening audience. Is there anything else you’d like to suggest before we part here today Aaron?

Aaron:   Yeah. A couple other bullet points I had kind of in the back of my mind, just keep liquidity. Liquidity is king in these markets. You want to keep that what we call a war chest. So the more liquidity you have, the more nimble you are. There may be a farm that comes up for sale beside you that you’ve had your eyes on for a while. Going back to that capex, if you are going to do it, I mean there’s some row crop farmers out there that don’t have much debt. So it’s certainly something to keep in mind that if you do see an opportunity like that, it may be advantageous to you. Again, know your customer. We’ve talked about before here internal we were having a conversation the other day about receivable management for different elevator and feed mill operations. You definitely want to keep that receivables item in play. Know where you are, know what industry you’re lending into.

One of the things as I mentioned earlier, one of the benefits to working in all of the different areas and ag culture is knowing where the money is and where the money isn’t. So in the past couple of years, dairy has really taken it on the chin, but they’re coming out of a downturn as of the early part of last year. So they’re on an upswing. So where you may have had to extend out terms for some dairy customers, maybe they’re able to pay you a little bit faster and help your cash flow. So just knowing where each industry is in ag culture and where they may be opportunities whether it’s the poultry industry expanding. Dairy industry, starting to see better returns. You may be able to realize some local or, if you will, macro-economic opportunities in your marketplace. Lastly, I would say take as many classes as you can—financial management classes—anything that’s offered out there. A day without learning is a day wasted.

Mike:   Well, I appreciate all the advice you’ve given our audience today Aaron. I wish you the best as you continue to work with agribusinesses and farmers here in the great state of Georgia. So the best to you and have a prosperous new year here.

Aaron:   Absolutely. Thank you for your time.

Mike:   Alright. Thanks Aaron. Bye now.