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How Farmers Can Cope With Less Cash

Working capital continues to fall.

The credit for farming in Iowa is tightening up, and the situation is expected to get worse.

Last year, ag lenders spent some time resetting debt and putting payout schedules in place. And, to keep from scare-mongering here, last winter’s efforts by bankers to soften the blow on debt that couldn’t be paid is considered to be the second winter of those measures.

A major problem is that some farmers have used up their working capital. When that happens, there is no money to operate on. For the past two crop seasons, better yields have kept many farmers’ working capital above water, but there wasn’t any improvement on that working capital.

John Jensen, farm financial adviser, Iowa State University Extension, is charged with helping farmers find a way out of the financial mess they might be in. He says that meetings being held right now between farmers and their bankers are finding some farmers unable to get credit for this year’s planting season.

Jensen, a retired ag banker, now works as an adviser. He sits with a family in their home and begins to lay out a financial path forward. To do that, he is armed with FINPACK, financial software for agricultural farm management, developed by Center for Farm Financial Management, University of Minnesota.

It hasn’t been used or relied upon much since that time. Yet, because of multiple years of low commodity prices and farm income falling over half from its peak in 2012-2013, farm financial assistance is needed once again.

So far, Jensen has not been faced with helping many farm families. He expects that to change over the winter months. One of the cases he’s been involved in is a fairly large family operation with a ton of debt.

“The family has $6.0 million of debt. The family just needed to hear someone else say that they needed to make changes in their operation to make them feel like they’re on the right track regarding getting financial help,” Jensen says.

How did the family reach out? In this case, the brother of the farmer in financial straits called for the help, Jensen says.

“The brother was concerned that his financially-strapped brother was going to make further decisions to make the matter worse. When I got to the farm, I discovered it was a family operation. Perhaps the best news was that there was a daughter who is a certified public accountant. She had an excellent set of financials for me to look at,” Jensen says. “To begin with, we talked about the financials that they showed me, where they were with payments, and what needed to be done,” Jensen says.

It is also important that farmers embrace any egotism issues, as they relate to financial stress. “This farmer got to be a big-time operator by renting ground at the expense of neighbors, covering a wide range of the countryside doing it, and ultimately trying to rent his self out of debt.”

“He thought that if he could rent more land and raise more crop, he could get ahead of the debt. But because of low prices and less-than-ideal yields, he had a tremendous amount of carryover operating debt,” Jensen says.

Solving The Problem

Because the farmer was worried about what the neighbors would think of him having to sell out due to financial loss, Jensen suggested couching the scenario as a retirement sale.

“The family has the room to sell some land to cut some operation back. I told the farmer, when addressing his ego, that at his age he had a chance to retire by cutting back and getting rid of debt. There will always be somebody who will talk about the way you have done things.”

Tips For Farmers

Jensen sees four areas that farmers can focus on to help rebalance their operation’s financial picture.

  1. Know real costs of operation.
  2. Know living expenses. Understand how much money is being pulled out of the farm operation and how much financial support is coming from an off-the-farm job.
  3. Know cost of production.
  4. Know how much it is taking to run the farm. For instance, figure in utility expenses, taxes, fence-building costs, etc.

Warning Signals  

In this case, the farmer didn’t recognize what the total production costs were along the way.

Neither did he understand what yield potential was really there. “They were banking on, ‘If I can rent another 100 acres, I can make $50 per acre. Well, that’s another $500 that I can use to pay off a bill.’ But, what they fail to figure is if they lose $50 per acre, there is nothing there to pay that bill,” says Jensen.

Do you want to know if your farm is in jeopardy of financial ruin? There are warning signals farmers can watch for, regarding a decaying financial scenario, Jensen says.

Other signals to watch out for:

  • If working capital has been gone for two years in a row, look out.
  • If the farmer hasn’t been able to make payments on term loan debt, sparking loan rewriting, it’s a flashing light.
  • If the financial recovery plan isn’t practical, perhaps realistically impossible, don’t ignore that sign.
  • If the farmer rolls more debt into a new combine than what the old combine is worth, be aware.
  • If, after taking advantage of the government’s excessive tax depreciation rules on machinery, there are still problems paying loans, this is a real eye-opener.
  • If the farmer’s crop yields are consistently running below county averages, he or she needs to admit that lost bushels mean lost income.

Suggestions For Help

  1. A farmer needs a good lender who will analyze the reality of farming and what needs to be done to get out of debt. For the farmer, it’s important to set aside personal desires. Yes, selling out is the biggest fear. But, after a thorough analysis, it’s possible that selling some assets could reduce major debt enough to give the lender the confidence to reset existing loans against the assets that are left. This gives the farmer room for payout.
  2. This process takes some real soul searching on the part of the farmer. Eliminate blame and focus on what can be done to make the financial stress better.
  3. Communicate with your banker.
  4. Talk to other lenders for second opinions.
  5. Visit with your area’s Extension office.
  6. Do some deep self-analysis. Ask, why am I here at this financially-stressed point? What can I do to get out of this situation?
  7. Keep in mind that sometimes lenders have bad suggestions for farmers. For instance, selling things, like cash- producing livestock that they shouldn’t sell.

Corn Belt-Wide Concerns

Iowa farmers in financial stress aren’t alone. Money is tight throughout the Corn Belt and Great Plains.

“We’re definitely going to see some people who have trouble making payments,” says Mark Holkup, recently retired farm management education professor at Bismarck State College in North Dakota. In some areas hit by severe drought last summer, a third of producers could be challenged, he says.

Closer to Bismarck, Holkup’s successor, farm management educator Kyle Olson, says “about 10% of the balance sheets are looking pretty tough.”

At Nebraska Farm Business, Inc., executive director Tina Barrett thinks about 5% of the service’s 600 members “will struggle to get renewed.”

In Minnesota, a hotline and Extension-based financial counseling was revived last winter. “We haven’t been inundated. We’ve got some cases that have called in,” says Dale Nordquist, associate director of the University of Minnesota’s Center for Farm Financial Management.

Working capital, a measure of cash or grain available for sale to meet a farm’s financial obligations, is shrinking for Minnesota crop farms, Nordquist says. Last year it was 39% of gross revenue — still above the 30% the Center recommends. Five years ago it was 53%.

Wide differences in production costs affect who’s vulnerable and who isn’t. “It’s amazing how much difference there is,” Nordquist says. In 2016, corn cost $3.06 a bushel to grow on the top performing 20% of Minnesota farms. It cost $4.44 a bushel for the bottom 20%. (Costs include rent.) Minnesota crop farms had a $30-an-acre difference in machinery depreciation and a $40-an-acre spread in fertilizer costs. Crop yields vary less, he says.

“The differences between operations these days have been in cost control,” Nordquist says. Improving cost control is hardly easy. “Most people think they’ve got it as low as they can,” he says.

Over the past two years, many farmers have already worked with lenders to free up working capital by amortizing operating debt over longer terms or moving machinery debt to a note on land, Nordquist and Holkup say.

“It isn’t something you do every year for the next 10 years,” Holkup says. And banks are limited by regulators on the amount of higher risk loans they can carry on the books. Some borrowers may be able to continue with their bank under a USDA Farm Service Agency guarantee, but that requires extra time and paperwork for the lender.

That’s why farmers anxious about loans could suffer by putting off a meeting with their banker.

“Don’t be the last one in the door,” Nordquist says. “I think you want to get in there when the lenders aren’t inundated with problems. There very well might be solutions that aren’t apparent.” 

For some, those solutions could be tough, involving an off-farm job, more cuts to family living expenses and even selling some land or machinery.

“Maybe you have to hire a combine for a few years,” says Barrett with Nebraska Farm Business. “It comes down to, ‘Do you want to be doing this in five years or not?’ You may have to do something that’s uncomfortable or different.”

Barrett shares tough-love advice in a University of Nebraska Extension web posting, “Preparing for Farm Loan Renewal Time.”

No one pretends this is simple. Any debt forgiven by banks or the sale of machinery that’s been depreciated can increase the taxes you may owe.

“You want to sit down with a good tax person to understand what the tax consequences are,” says Holkup.

Tax issues are just one reason why farmers with stressed finances should get outside advice. Barrett says it may be just talking to a trusted farming friend in another state or hiring an accountant and attorney. Many states offer help through the Cooperative Extension Service as well.

“Sometimes you’re so close to the situation that you can’t see something that can be done differently,” Barrett says.

Soft Hard Times

As bad as financial stress might be for some, working out of debt may be less difficult than it was in the bad old days of the 1980s. Here’s why:

  • Banks are less stressed. That’s Nordquist’s impression from the American Bankers Association’s recent ag lenders meeting. “I don’t sense a great degree of uncommon concern among the banks,” he says.
  • A strong economy offers off-farm work. In Bismarck, North Dakota, power plants and other industries are hiring, says farm management educator Olson. “There seems to be a lot of work and a lot of opportunities,” he says.
  • Land prices are still strong. If a farm family has equity in land and chooses to sell a parcel, “they could live to farm another day,” Nordquist says.
  • Even in Kansas, where farmers have endured three years of depressed wheat prices, few are actually insolvent. They’re not candidates for bankruptcy, says Bryan Manny, an Extension agricultural economist working with the Kansas Farm Management Association in the south-central part of the state.

“We have many producers who have positive equity or net worth — perhaps $2 million or $3 million,” Manny says, “but they can’t cash flow.” Cash flow problems are leading some lenders to reject a few loans, he says.

“Some people have sold some land, a small percentage at this point,” he says. Others have retired earlier than they had planned.

Most are trying to reduce costs for chemicals, fertilizer, soil sampling, and seed and are buying little machinery, he says. “They’re just trying to hold on to as much cash as they can at this point.”

Sage Advice From The Plains

A movie about a Christmas miracle saving a struggling farm inspired adviser Tina Barrett to offer real-world advice online: “Preparing for Farm Loan Renewal Time.”

“It made me wish the struggles of the real farm economy could be fixed in less than two hours, with no family arguments and the only unknown being how it would be solved, not if,” Barrett says.

For farmers living outside of Hollywood, she offers three suggestions before meeting with lenders:

  • Be prepared. “Come into your renewal appointment with a plan,” she writes. The plan should be detailed and realistic — no abnormally high crop prices or unrealistically low family living costs.
  • Be honest. “Being honest with yourself is just as important as being honest with your lender,” she argues. If you blame everything on low crop prices, you need to look harder at your own operation. Low prices aren’t bringing everyone down.
  • Be accountable. “This is YOUR farm operation. YOU get to make the choices about how the money is spent,” Barrett advises. “You can choose to operate older equipment instead of having the latest and greatest technology. You can choose between buying a $60,000 family vehicle or a $30,000 one. You may have to make unpleasant choices, but they are still your choices to make.”

Barrett lists options if a loan is denied, including USDA loan guarantees and bankruptcy. Get outside expert advice, including counseling for marital or emotional stress, she says.

Dan Looker, Successful Farming freelancer and retired staff editor, contributed to this article.

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