Hi, I am Kim Schmidt, Executive Editor of Farm Equipment. Welcome to Farm Equipment's Used Equipment Remarketing Roadmaps Podcast.

In this episode, Casey Seymour of Moving Iron LLC visits with Alan Hoskins, President and National Sales Director of American Farm Mortgage. This episode of the Used Equipment Remarketing Roadmaps Podcast is brought to you courtesy of Agrisolutions.

Let's jump in as they discuss interest rates and working with farmers to strategize, what the impact of rising interest rates will look like, and how to minimize that impact.

Today I have got Alan Hoskins back on here with me. Alan is the, now correct me if I'm wrong here, you're the President and CEO and National Sales...

President and National Sales Director.

There you go. And he is out of what? It's Lexington, right? No, Louisville.

Louisville.

Louisville, Louisville. So I asked Alan if he wanted to come on and do a monthly thing and just kind of talk about what he sees happening in the banking industry and how it overall kind of reacts to what we see happening in the ag industry, and he was more than willing to do that. So Alan, I appreciate this, man. I'm looking forward to this.

Well, Casey, I appreciate the invitation. I always enjoy being on here, and as you and I have talked, I always learn some things by being on your podcast as well.

Well, I appreciate that, man. I'm looking forward to this. It's going to be good.

So let's start with this. So we're headed into, you got renewal season coming up, you got farm lines of credit coming up here for renewal and what that looks like. This time last year, what was interest rates, 3.5%?

About 3.25%, yes.

3.25%. So now we're at... The Fed is right now, and you start looking at stuff all over the place, so you're going to be somewhere between, depending on what it is, 6.5 To 8% depending on what the Fed continues to do going into February and March in those timeframes.

What conversations are you having right now with the people you're working with, Alan, that are different than what you were having this time last year?

Sure. Well, first of all, Casey, there have already been a lot of conversations, and those conversations were designed to make sure borrowers understood where interest rates were, what that meant to them, so that there's not a case of a one-time-a-year communication creating sticker shock because of what rates have done. But also, just trying to make sure that the communication flow stays constant to help them devise some strategies to minimize the impact that the interest rate increases are going to have.

So over the past few months, we've talked about, obviously none of us have a crystal ball that can accurately predict when interest rates are going to move or where they're going to move. So it's been a good exercise to make sure that people understood where they were currently, make sure kind of where the market was headed and be able to, in cases over the past few months, if there were some good opportunities to help them restructure some debt, get that done before rates went any higher, and get some rates locked in, as well as talking about the impact on operating line interest equipment because there's still good opportunity, I think, in purchasing equipment out there.

So it's been more a matter of helping strategize what the impact of these interest rate increases will look like and how to minimize that impact.

Yeah. So one thing I've talked a lot about, and I've written a lot of articles about it and talked a lot about it on the podcast, is this rise of the upgrade kit, what that looks like. So you start looking at some of these, the price of new equipment, some of the technology that you can just retrofit back to, out there. Primarily, it's on planters and sprayers right now, but I think other platforms are coming soon. You're going to start seeing some different stuff pop up.

You know, you take a look at... And this is the thing I would love to have your perspective on from just a balance sheet perspective on what it looks like and how you measure this. Five years ago, I bought a $250,000 planter. I go to the local dealer down here and I priced out a new planter, and the new planter is now, whatever, $400,000 bucks or whatever the number is. I'm looking at that going, "You know, I'm going to get X dollars for mine. What about X dealer?" My trade difference is going to be somewhere in the neighborhood of, let's just say, $250,000, $300,000 bucks, something like that to make that trade difference happen. I can get the same upgrade kit for $150, $200,000 bucks. So from a cash outlay perspective, we're looking at, there's a $150, $100,000 difference in cash outlay.

Now, the difference is now I still have my investment that I made in my $250,000 planter or $200,000 planter five years ago, I'm going to put another $250 or $200,000 down. So now I got a $500,000 planter, or I could just buy a brand new one for $400,000. But the cash outlay and everything else that's there is going to be even greater than what we talked about previously.

How do you look at that and how does that fit into what you're talking? Because I mean, you're really upgrading something to basically a new machine now. It's a new-new, it's just the same, it's different. The only difference is the bar and the capital outlet you had before. So I guess as you're looking at that, Alan, how do you weigh that technology and how do you look at that from a dollars and cents perspective?

Casey, that's a great question. And first of all, I'll give a disclaimer here that what I'm about to say may not be reflective of all in the lending industry. This is my personal perspective. I'll say that right up front.

I'll also say this, what I'm about to say, the folks that listen to your podcast regularly, this is going to sound somewhat familiar to them, and that's this: you and I have talked before about the difference between the investment in trading or upgrading equipment versus the cost of investing or upgrading equipment. And Casey, here's what I mean by that, here's the real-life example.

I have some customers that I can take their 10-year yield history and I can point to the exact year that they made a significant investment in technological improvements in their planter. Because of what they did there, we've seen their yield trend change. That's what I'm talking about when I say, "What's the investment value and the upgrade?"

Because I agree with you, I think what you're talking about, particularly as it relates to planters, that's going to become more and more commonplace and probably should become more commonplace because when the technology allows you to capture profit opportunity because you're using it to do something different in your production, that's the exact type thing that I, as a banker, that's exactly what I want a producer looking at because I welcome that conversation when they come and say, "Can we sit down and talk? Because I've got the opportunity here. I can trade planters," and I'm going to use arbitrary numbers, "but I can trade planners for $250 or I can upgrade my units and my technology on my existing bar for $150." Okay? Let's sit down and talk about what each one of those investments is going to return you.

And I love it, Casey, and I think there's more salesmen in your industry that are doing a really good job of this every day. I think they're helping educate those borrowers. And I personally love it as a banker when a borrower comes in and they're prepared to have that discussion.

Now, from the banking perspective, and again, here's why I say this is my personal opinion, it may or may not be reflective of the banking industry as a whole, with the cost of trades and upgrades, many times today it's not necessarily just the individual lender that is going to be considering that request for financing. It may very well be going to a collective group, a loan committee, if you will, that is making that decision. And that's where that data of profit increase opportunity becomes valuable to the lender because a lender may or may not be communicating with a group of people in the banking industry, they may not understand the difference between the John Deere 7200 and the John Deere 1795.

So it's about being able to tell the story from a business perspective and educating folks that may not have similar knowledge of how this technological investment is going to return value to that customer. So I think that's the key thing, Casey, going forward. And it goes back to that age-old issue of communication. How do we communicate, what do we communicate?

And from my perspective, personally, I love those conversations for two reasons. Number one, it helps me understand the knowledge level of the borrower that I'm working with. Now, I probably already have a pretty good idea about that anyway, but that conversation does nothing but help to cement that relationship even more that this farmer's on top of their business game as well because they're looking at these things, but they're also then giving me the information that I need in order to communicate with a collective group about why this is a really good opportunity for this borrower.

So would you recommend, for example, taking your agronomist with you into something like that to further explain that, what seedbed preparation does for planning?

You know Casey, I think if the farmer is not comfortable having that discussion by themselves, absolutely. Because one of the things, again, if I look at me as a banker personally, and I think this is true for the most part in the banking industry, we have discussions with producers where we say, "Look, we're a member of your advisory team." Well, most teams function a little bit better when all the members have the ability to communicate with each other. I'm not seeing a lot of teams that do real well otherwise.

So yeah, I think there, Casey, is a great opportunity because it allows that relationship to be developed among the advisory team members for that farmer, and it allows for any specific questions to be answered directly from the source. So yeah, I think that would be a great opportunity for learning for all parties involved in that.

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Now back to Casey.

So from a information... You brought up where you had a customer and you were looking at their 10-year yield average and those kinds of things. How much of that data do you think would be worthwhile taking with you or at least making available to your banker? I mean, obviously a banker has understand what they're looking at, but I mean, I guess what's your opinion on that?

Well, first of all, if that customer's been dealing with that banker for multiple years, I really hope that banker already has that information and they're getting it from the producer annually. If it's a completely new relationship, I think that is a tremendous tool to have to help the banker see what has been done. And it also, Casey, helps that banker understand the basis upon which projections are made going forward so that that banker has confidence that the projections are attainable based upon history.

Now, obviously if this is a new purchase and it's a new relationship, then the communication's going to sound a little bit differently just simply because there's not the history there. But I do think, Casey, that is a fantastic thing for the producer to have. And number one, the crop insurance agent has that information, if they're not maintaining it themselves. But I would think most producers probably have that five or 10-year yield history that they can reference.

Okay. So this is also the time of the year too where you start taking a look at balance sheets and what's on there as far as assets and those kinds of things go, and you're starting to look at values and what that looks like and all those kinds of things.

How often do you, as a banker, go through and look at what the values are stated on the balance sheet for, for the combine, for the tractor, for the planter, for the tillage pieces, the so on and so forth? And how often do you go through and be like, "We're going to do an appraisal of this so we can really get a hardcore value of what we see in the marketplace?"

The answer to the first question, how frequently do I do it, at least every 12 months. Now, relative to the appraisal, traditionally speaking, I do not want a customer expending funds for something that they're not going to see some value for.

Sure.

Here's some ways that the customer can see value, and candidly, what I'm about to say is probably the single biggest discussion point we're having about equipment right now as I sit down with people.

My concern, if they don't have an insurance agent that is meeting with them annually that has knowledge in this industry and is reviewing the data, I don't want to see them have a combine fire or worse yet, we had a case in our area not too far from us, where a shop burned recently and a lot of equipment inside. I don't want to see them find out that they were underinsured at the wrong time. Now granted, none of us wants to pay higher insurance premiums, but the reality is we don't want an indemnity claim and find out that what we thought we had, we really don't have.

So that's the primary thing that, as we go through a complete machinery and equipment list, that I'm encouraging them, "Hey, take this data that you and I have just compiled," because most of them don't have a current machinery and equipment list. I shouldn't say that, but unfortunately it's true. "Here, here's something that you and I have created together. Take this to your insurance agent. That way they have a record of what you have. Let's just make sure it's accurate." But there's a good way that I could provide value as a lender, providing that list and, "Hey, if there's any questions on it, please have your insurance agent reach out to me." So I think that's a good value proposition.

I will also say this, Casey, traditionally speaking, appraisals on the banking side are utilized when there's a refinancing being done. Now, historically speaking, one of the things that I've seen in banking, if you do a real estate loan, there's always going to be an appraisal or an evaluation, depending upon what you're looking at, is we've seen the value of equipment, in my opinion, grow exponentially. Plus as farms have gotten bigger, you're looking at machinery and equipment being a significant component of total equity for that operation.

I would say this, it's not terribly uncommon to see machinery and equipment amount to 30 to 33% of total equity depending on the circumstances. That's a big number. And I would expect, Casey, going forward in the lending industry, I think machinery and equipment appraisals may become a little more commonplace than what we've seen historically because over my career, I've not seen a tremendous amount of times where machinery and equipment lists have been subject to an appraisal. There have been some, don't get me wrong, but it's certainly not as commonplace as what we see on the real estate side.

The other reason, Casey, that I think machinery and equipment appraisal can be of significant value, one of the discussions that I have frequently with borrowers today is the importance of both a succession plan and an estate plan, and in valuing an estate, depending upon how the title of that machinery and equipment list is held, here again, you're talking about significant numbers. If you're working with an attorney and you're going through your list of assets, I would hate to see someone grossly under or overvalue that machinery and equipment list. And I think there's a pretty important piece of information to have as part of your estate planning.

Right on. Okay. That's always something I'm somewhat shocked by is for the number of dollars associated with it, how there's some guys I work with that know, to the penny, what something's going to bring in at auction, and there's some guys that I work with that have no earthly clue what it's worth. And I think to me, that's one of those things, especially because you just said it's almost 30 to 33% of the equity that's out there, that's a big chunk of something that you don't know what it's worth.

I think a lot of guys understand what their land's worth. I think a lot of guys understand what those kinds of things, their cattle are worth and corn, their crops are worth, but there's still a whole third of their entire operation out there that is just left to... I mean, I know there's only so many hours in a day to educate yourself on things, but it's just one of those things where I think having that good partnership, like you said, that advisory board of people, trusted advisors type of thing, that can keep that in check. So, right on.

And Casey, again, that number, that 30 to 33%, that number can vary wildly. If you've got an extremely large operation that relies predominantly on rented acres, that machinery and equipment list may be a higher percentage for overall net worth. So when I use that number, I'll say it this way, there are instances out there where that number is going to be way higher than that, and there's also less than that.

But I guess my point being, and you touched on that very well, I think that's an important enough number to have a good handle on. And it's okay if you don't know today because of what you said, we can't all be experts in everything. It's okay to maybe not have a good handle on it, but if you know you don't have a good handle on it, what are you doing about making sure that you don't create yourself a problem down the road because of your lack of knowledge in a certain area?

Right on. Okay. All right. So this is a crystal ball question here. I don't know if yours is broken, as cloudy as mine is. But I guess looking out through '23, what are some of the concerns you're looking at and what are some of the optimistic points you see kind of headed our direction?

Well, obviously we still have input costs that are high in relation to what we are used to historically. Depending upon where you are in the country, we don't know what we're going to be looking at from a moisture perspective going into this crop here. So, those are two things that I would say are challenges worth taking note of.

I've heard some discussion recently that similar to what the discussion was that we heard going into 2022, there could be certain chemicals that may have limited availability. Again, we didn't see that, despite the discussion that we heard of that in our area and going into the 2022 crop, we didn't see that manifest itself over a wide area. I have no idea what 2023 is going to hold. I'm not an expert in that area, but I have heard that discussion.

We know interest costs for those folks that are borrowing operating money, we know those costs are going to be higher than what they were in 2022 for the most part, unless someone was pretty forward-thinking and locked in some borrowing costs on operating lines, either through the form of securing it with cash or with some multi-year interest operating products that are in the marketplace. So, I think those are some of the challenges.

Opportunities, I think there's still a lot of them. I'm still very bullish on agriculture. We're going into this year with some pretty good pricing opportunities, even with the input costs that are out there with some of the pricing opportunities that we have today. There's some profit opportunity I believe that's presenting itself as we move into this crop here. Obviously, we don't know where the yields are going to end up for 2023, but our crop insurance does give us some pretty good potential there. We know on the corn/soybean side, we've got to see where February ends up before we know what that base level's going to be. But I do think, Casey, the current commodity process provide a good discussion point for farmers to be having with their marketing representatives of how they can lock in some profits.

I think as a whole, going into 2023, and again, we'll know more as we kind of see where year-end balance sheets end up, I think working capital is going to still be a strength that most operations have because of the year that 2022 appears that it will be. So I think that's a very positive item as well.

You can speak more on the increasing availability of equipment than I can. So I would think that supply chain issues get resolved. Some of the challenges that we've seen over the past couple of years in equipment availability, hopefully we'll see some things develop there that kind of ease the supply chain, and that's true whether it's a part issue or whether it's a machine issue. So, I think there's some things there.

An intangible positive that I see, you guys have proven, I think, over, and gals too because there are some great females out there operating farms, I think producers have proven that they can handle the challenge of dealing with smaller margins on bigger dollars from a business perspective. I've seen producers increasing their business acumen. I think they're becoming more proactive in understanding their numbers than what they were a few years ago. I think they have a better understanding of breakeven points.

And what I'm seeing, for the most part, I'm seeing producers welcome the opportunity to learn of how they can become better business people. I think that's a huge positive that we have going into it. And as the average size of operations continues to increase, that's going to become a more and more important tool, and that's where those advisory groups that I referenced earlier, whether it's a banker, whether it's the equipment dealer, the crop insurance agent, the marketing person, I think that's tools that producers have come to learn that they can utilize in a more effective manner than maybe what they have historically.

Right on. Okay. I agree with everything you're saying there, man. We'll talk about the equipment availability issue on the next podcast because I think there's some things there that are going to, I think, have a pretty big effect on the marketplace as we move forward.

Well, love talking to you, Alan. If folks want to reach out to you and get more information about what you're doing over at American Farm Mortgage, what's the best way to do that?

Sure. Probably the simplest way is the email and my email is a ahoskins@americanfarmmortgage.com. I also welcome phone calls. I'm still old school, Casey. I love having conversations with folks because I learn from them. And that phone number is (800) 876-2362.

Right on. Well, and I appreciate you being on the podcast, man. I look forward to next month when we sit down and talk again.

Absolutely, Casey. Thank you for the opportunity. And by the way, you do a great job on here. You educate a lot of people. I appreciate what you're doing for helping agriculture, and I'll also put a plug in for the summit that you have, the Moving Iron Summit. It is a great opportunity to learn, a great opportunity to network, and I would highly encourage people to take that opportunity.

I appreciate that, Alan. Thanks very much, man.

I am Casey Seymour with Moving Iron Podcast. Check me out on Facebook, Twitter, and Instagram @MovingIronLLC. Go to LinkedIn at Moving Iron Podcast, and check out the video version of this on the cleverly named Moving Iron Podcast YouTube channel. So check that out.

You can also find a lot of information about what's going on here at movingironllc.com. You can find all the information from the Moving Iron Summit that will be getting posted here over the next couple of weeks. We got some pretty good speakers lined up and got some other things lined up too. I think they're going to be pretty interesting, so check that out.

You want more information about that? You can send me an email at movingironpodcast@movingironpodcast.com, and I will get that over to you. Make sure you take advantage of that $50 discount from the folks over at Axon Tire.

So with that, I'm Casey Seymour with Alan Hoskins. Let's go move some iron, folks.

Thanks to Casey for sharing his conversation with us. You can keep up on the latest industry news by registering online to receive our free newsletters. Visit www.farm-equipment.com. For Casey as well as our entire staff here at Farm Equipment, I'm Kim Schmidt. Thanks for listening.