Scythe & Spade Blog

Calculated Leverage

by Monte Nevitt

One of the significant points made in this year’s Urban Land Institute conference held yesterday is that banks have cheap money available for land deals but no one appears to qualify. The bank’s dilemma? They can’t find credit-worthy borrowers. The downturn has left so many of yesterday’s landowners upside down in the greater Phoenix market that the previous players don’t qualify for loans today. It is ironic that the patient and disciplined farmer, who decided to stay on the sideline during the irrational exuberance that was displayed during the last boom is the very individual who is now going to his lender to qualify for the loan to buy back the farmland.

Strong commodity prices, coupled with depressed land values leave today’s farmer with an opportunity to leverage to increase the production and revenue, to address loan payments, to replace aging equipment, or to expand the size of the operation through purchase. In some cases we see dairy farmers buying land, not so much because of a desire to expand – but rather to shore up acreage on which to raise hay to bring their feed cost down.

Ninety five percent of the last thirty five land deals done in Pinal County were closed by farmers or ag related entities.

An article in last Friday’s Phoenix Business Journal highlighted the use of leverage in today’s favorable ag climate to expand and to improve the agribusiness bottom line.

Of particular note in this article is that the Journal highlights a farm purchase in which Scythe & Spade played a key role. The opportunity presented itself for a purchase and expansion onto 1,000 acres in the south Coolidge market. The deal would require a 30 day close. It also required two separate appraisals, a bridge loan of $5.4 million, preparation of material, due diligence, and budgets for a loan underwriting committee, shared well and ditch agreements????, opening and closing escrow, all in a 30 day time period!

Scythe & Spade was able to open its files and due diligence binders, plot in and pull down GIS maps on the property, update budgets, provide materials to appraisers, loan officers at M&I, and to the buyer, coordinate a 1031 exchange, and close escrow by the 22nd of December. In short – the seller , the buyer, the lender, the appraiser, the neighbor/partner, and Scythe & Spade all ended up looking good on the deal.

Take home point: because of Scythe & Spade’s ability to coordinate the deal, this farm family was able to seize a unique opportunity, come to alevel of comfort on a very shortened feasibility, acquire a loan from a cooperative BoM/Harris Bank, and be poised to take advantage of a forgiving commodity market going into 2012 on an expanded acreage.

Sugar Cane Ethanol

by Brett MacNeil, CEO

In previous Blogs and Newsletters, we have warned often about probable changes in subsidy laws and payments, both because of U.S. budget problems, and because farming has become more profitable.

Suddenly (and most corn growers are aware), on December 31, all tariffs and tax credits protecting corn ethanol have been removed. Brazilian sugar cane growers are ecstatic. As stated by Marcos Jank, president of Brazilian Sugar Cane Growers Association, “We have been waiting for this for over 30 years.” Now both countries can compete for the ethanol market directly, and without subsidies of any sort.

Brazilian sugar cane has other advantages over corn-based ethanol; a.) it takes less land to grow comparable ethanol producing sugar cane than corn; b.) it takes less fossil fuel to grow and convert sugar cane to ethanol; c.) cars run well on a higher proportion of cane-based ethanol to gasoline, 18-25% vs. 10% corn-based ethanol. In fact, some vehicle manufacturers, especially motorcycle makers are suggesting no ethanol usage as it is beginning to damage rubber parts in fuel systems (the jury is still out).

The cynics among us have concluded the only reason the subsidies lasted so long was because Congressmen and Senators in corn producing states have been effective in protecting the subsidies, and Iowa is the first state to hold Presidential caucuses, so what candidate in the Iowa caucus would want to suggest ending tariffs and subsidies?

Despite the sudden end of tariffs and subsidies, we still see a huge world-wide demand for corn, and therefore do not foresee a market bust. Nonetheless, we urge our farmers to watch world events and changes, always increasing in number and consequence. Because we carefully watch all governmental activity, let us know of any questions you might have. We insist on “Seeing a trend before it becomes a trend.”

Water Wars

by Monte Nevitt

Water is a key ingredient, if not THE key ingredient in agriculture, and even more so in the arid Intermountain West and Southwest. We pay a great deal of attention to it as the lifeblood of our industry and lives.

There is an interesting book published by Alex Prud’homme in 2011 entitled “The Ripple Effect” which discusses water mis-use, over-use, waste, contamination, and lack of attention paid to the commodity. Because we have historically had water, why worry?

Most of us are keenly aware, or should be, of many of the issues outlined in Prud’homme’s book---deserts moving north around the world, dead zones in the sea water at the effluent of all major rivers, decaying infrastructure of supply and sewage disposal in most major cities, aging dams and canal systems delivering water to farms, and finally, only about 1% of the world’s water is fresh and liquid.

A familiar sight for those who have visited the administration building at Salt River Project (SRP) is a painting of a Zanjero, on horseback, armed with a rifle, guarding a weir box at a water distribution point. At one point it was a justifiable homicide in the west to take a life over water. One of Prud’homme’s theses is that in the future there will be wars over water; something we all recognize is probable with growing populations, and shrinking availability of water and quality water. He does feel that the primary problem is associated with water quality, and is a result of total mis-management of the commodity and delivery systems.

Recognizing the truth of water mis-management, Scythe & Spade focuses much of its effort on water, including water rights, availability, and mostly how to reduce usage. Knowing that agriculture uses 70-80% of all water in the US, and even more in the Southwest which is in the middle of a long-term drought, all farms are in the gunsights. It is not a matter of IF we reduce use, it is simply WHEN and HOW we proactively implement water reduction strategies.