Keeping their heads above water

For both debt and equity providers, flooding in the US Midwest could provide opportunities to demonstrate the benefits institutional capital can offer.

Pessimism surrounding US agriculture can obscure the fact that some of the sector’s struggles in recent years are adjustments to its own success. For example, low commodity prices challenging producers are the result of record yields achieved through growing use of on-farm and input-related technologies, the benefits of scale and a period of largely good weather.

Last week, flooding caused by excess rainfall and snowmelt across Nebraska, South Dakota and Western Iowa killed at least four people and damaged stockpiles, railroads, grain silos and other infrastructure, providing a potent reminder that such conditions are by no means guaranteed – especially with climate change’s impacts growing by the day.

Since the last regional weather event of comparable impact – a 2012 drought throughout many key ag production zones – institutional investors have expanded their role within US farmland markets.

Though the precise impact of last week’s flooding on individual operations and farmland managers will depend on sector and regional focus – and will likely remain closely held in the medium-term – early indications suggest it could prove a seminal event for private investors in the US.

Curt Hudnutt, an executive vice-president and head of North American rural banking at Rabobank, told Agri Investor it will likely be months or years before it will be possible to have a clear sense of the flooding’s full impact. It is already clear, however, that catastrophic floods have resulted in substantial losses for some of Rabobank’s borrowers, Hudnutt, based in St Louis, Missouri, added.

“I grew up in Iowa; I’ve seen plenty of flooding in my life, but never anything like this,” he said. “It was the culmination of so many different events happening all at once at just the absolute wrong time.”

Responding to borrowers impacted by such weather events, Hudnutt added, often involves proactively confirming the safety of the producers and their families, rather than waiting to hear about how much damage their operations have incurred.

“The first question we ask is not, ‘How many cattle did you lose?’ or, ‘What’s the financial impact to you?’ It is, ‘Focus on the things that are most important, and we will be there for you when you need us,’” Hudnutt said. “We let them know that we will do everything in our power to continue to support them – whether that means deferring payments or providing capital – though obviously each producer is in his or her own financial situation.”

Of course, those differing financial situations introduce another element of uncertainty into gauging the effects of last week’s floods.

If the floods do lead to an increase of farmland properties on the market, Doug Hensley – president of Hertz Real Estate Services and a farmland broker licensed in Iowa, Illinois, Minnesota and Nebraska – told Agri Investor the liquidity institutional investors can provide will prove especially important.

Hensley – who said recent years have already seen growth in sale/leaseback transactions with institutional investors – added it would likely be about six months before all the damage will have been accounted for and the event’s true market impact becomes clear.

“As the waters recede and people are able to better survey the damage and get a feel for what they need to get done to clean things up, we’ll figure out whether there is a bigger problem,” Hensley said.

Some producers will no doubt find the damage caused by the floods has forced them to re-think the tenability of their financial positions; others might embrace the opportunity the disruption provides to make strategic changes to their business. Whether it’s debt to help restructure an operation or equity to catalyze a transition from direct ownership, agricultural investors are likely to be given opportunities to help producers keep their heads above water.

Write to the author at