Guest author Paul Burgener, published Farm Futures story
Short 2012 crop creates concern for new crop demand; lender relationships critical
Let’s face it: Most farmers have been on a roll when it comes to making money.
“Making money in farming for the past six years has been like falling off a log,” quips Terry Kastens, a Kansas farmer and former Kansas State University ag economist. “Nobody has had a poor relationship with their lender for the past 10 years.”
This year might test those relationships, as higher prices for land, machinery and inputs are combining with lower-expected crop prices.
“Renewal time this fall will be more difficult, with cash flow budgets tighter than they have been in years,” says Lewis Coulter, vice president and agriculture lender at Platte Valley Bank in Bridgeport, Neb. “We are going to need to manage costs better as margins get tighter.”
The past several years have allowed farmers to strengthen balance sheets and prepare for a down year. Average farm debt is lower, putting farms in strong equity positions heading into what might be a leaner profit year. The current debt-to-asset ratio for U.S. farmers is 10.2%, according to USDA’s Economic Research Service. The same ratio was 13.5% in 2003, and 19.4% in 1983 just as the farm credit crisis began. Even so, operating loans will need to cash flow.
Tighter cash flows
Lower prices for corn and wheat, along with uncertainty in the soybean market, will likely open cash flow projections with smaller gross revenue numbers than in the past few years. Farmers with a good handle on their costs are going to be better prepared to develop projections that will be acceptable to lenders.
Cost control starts with cash rental rates that have been bid up to match high commodity prices in the past few years. This could be the year to adjust those rates back a little if the farm has adjusted rental rates higher as commodity prices increased.
For those farms that were late to the game in raising rents, there might be a lag going back down, putting pressure on the cash flow projection.
“Those same guys that are overbidding for land today are the same ones that didn’t pay enough rent on the way up,” Kastens notes.
Take advantage of discounts
Suppliers recognize this will be a tighter cash flow year and will be knocking on doors with attractive deals, trying to get sales made to quality operators. Take advantage of early purchase discounts and favorable financing to get seed, fertilizer and crop protection inputs priced before spring.
Lenders should be willing to support the purchase and financing of inputs with favorable terms that will help the cash flow. Disclose those purchases and credit arrangements to the lender at renewal time, but take advantage of those low to zero interest plans when they are offered.
On farm research pays
Farms that were doing their own research during the profitable years have an advantage: knowing where their production system can be tweaked to save a few dollars per acre in tight cash flow years.
The time to experiment with a new technology or lower-cost product is when times are good and the farm can absorb a small loss. Now is the time to implement those cost-saving ideas that worked in your on-farm plots or other tests.
Lenders are more willing to support an experiment when there is adequate cash flow to cover a failure. Low interest rates and better-than-average prices for the past few years have encouraged banks to open hedging lines for customers that were not using these marketing tools.
Lender relationships critical
Long-term relationships with good agriculture lenders will help farmers get through the next couple years as cash flows tighten.
“The stable bank that is familiar with your system and has a long-term agricultural commitment to area farmers will be a good partner as margins tighten,” says Coulter.
Long term, using caution and a prudent financial strategy is the best way forward in potential lean times.
“We don’t know what will happen if there is another crash because very few of the lenders from the 1980s are still around,” concludes Kastens. ff