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How to Navigate Through This Economic Downturn in Farm Margins

Despite low crop prices, Greg Beebe held out hope that 2019 could be the year agriculture began climbing out of its prolonged economic trough. Instead, the fifth-generation North Bend, Nebraska, farmer confronted a flooding disaster that buried irrigation pivot towers up to the tires in mud and shifted grain bins off their foundations. 

“There will be tough times to work through,” he says. “But I expect most of my ground to be productive.” He plans to plant cover crops and forage on the 10% to 20% of his acres covered by 2 feet of sand and silt deposited by the Platte River. 

Financial stress ratcheted up last spring for farmers submerged by historic flooding. Beebe and thousands of other Midwestern farmers are eligible for state and federal disaster assistance. For those who survive, recovery will be a heavy lift.

Farmers who were spared spring flooding are at risk of being submerged by the economic undertow of the past five years. “In this current environment of low margins and high volatility, it’s all about managing around the uncontrollables,” says Dave Kohl, retired Virginia Tech professor and veteran ag banking consultant. 

Overall, farm loan delinquency rates at banks remain about 2%, based on Federal Reserve and FDIC numbers. However, working capital has been decimated, declining 24.7% from 2018 according to USDA’s ERS. Trade agreement turmoil has triggered seismic losses in soybean exports, and the debt-to-asset ratio has climbed for six consecutive years.

As a result, bank regulators are becoming more conservative, and lenders are tightening collateral requirements.

Land values, a core component of a lender’s criteria, have remained relatively strong. The Federal Reserve has signaled that interest rates, a major driver of land values, are likely to remain steady. But 2019 could be a pivotal year.

6 ways to manage the controllables

The key, Kohl says, is focusing on factors that can be controlled. If your operation is taking on water, what can be done to bail it out?

1. Add revenue. Diversification, custom work, and off-farm jobs remain key work-arounds. “More producers or family members are taking off-farm work for health care benefits,” Kohl says. 

Leslie Miller, vice president and ag loan officer at Iowa State Savings Bank, Knoxville, agrees. “Some families pay $18,000 to $25,000 in premiums,” she says. “Even if a job doesn’t pay very well, benefits save out-of-pocket costs.”

Today’s gig economy is fertile ground for old-fashioned enterprise. “Millennial producers tend to be entrepreneurial multitaskers,” Kohl says. “One New Ulm, Minnesota, producer told me his son started a towing company. Off-farm gigs that fit with the core business
create real resilience.” 

2. Reduce family living costs. “Ag lenders say family living is a top reason for refinancing operating losses onto term debt,” he adds. “We advise measuring daily living costs. Our surveys show the average is about $138.”

Utilities can be a money pit. “We used to budget $2,400 to $3,000 annually,” Miller says. “Now there are $200 monthly cell phone bills, with kids on the plan, along with cable, electric, and propane. We see $9,600 to $12,000 budgets.”

3. Shave expenses. “Right-size inputs and machinery,” Miller says. “Some soils won’t ever grow 200-bushel corn. If acres have been reduced, replace equipment with smaller, older machinery to keep costs in line.” She adds, “If you lock in anhydrous, be careful; some farmers couldn’t apply last fall because of weather. Their prepurchase contracts were torn up.”

4. Improve marketing. “Holding multiple years of crops can erode working capital, leading to restructuring debt to make annual cash flow work,” says Steve Johnson, Iowa State University Extension & Outreach farm management specialist. “Storing unpriced bushels past harvest has both futures and basis price risk.”  

Miller suggests a laser focus on basis. “Lock in some of your 2020 basis,” she says. “Usually it’s narrower further out. A farmer with a 10¢ basis contract sold grain at harvest last year for 10¢ under the Chicago Board price, while others were paid 50¢ less.”

5. Refinance. “Farmers using land equity to reinvent or readjust their businesses could come out on top, but using it to refinance could drown them in debt service,” Kohl says. “Land equity is a great bridge over troubled waters, but we’ve got to use it as an advantage.”

The farm bill’s higher FSA loan guarantees offer flexibility to bankers to ease the terms. “If a bank can’t finance more than 50%, an FSA loan may move it up to 70%,” Miller says. “A five-year repayment plan for cattle and machinery could stretch to seven years.”

6. Restructure debt; consider Chapter 12. Almost 83% of bankers in 10 states responding to the Rural Mainstreet Index indicate that restructuring loans has been a top recourse for ag financial stress. The Kansas City Fed reports that the share of bankers with ag borrowers planning to sell mid- to long-term assets rose from about 75% a year ago to nearly 85%. 

“If you’re still losing money and struggling to make payments after restructuring, look at it on a farm-by-farm basis to pinpoint the problem,” Miller says. “Don’t keep doing what you’re doing.”

The stakes are highest for dairy farmers. The farm bill’s new Dairy Margin Coverage program offers more affordable and higher coverage levels to those who are able to keep their heads above water. 

Chapter 12s are at their highest levels in the Midwest in more than a decade, led by Kansas, Wisconsin, Nebraska, and Minnesota. 

On some farms, difficult finances have accelerated a transition to the next generation. “The younger generation may qualify for beginning farmer loans and may have more time to hold on until the financial outlook improves,” says Duane Hund, Kansas Ag Mediation Services farm analyst.

He encourages farmers to think outside the box. “One young producer sold an easement to a national conservation nonprofit and used it to pay down real estate debt,” he says. “In return, he agreed to devote 20% of the land to cover crops and wetlands.”

Finding Higher Ground

It’s too soon to forecast the fallout from devastating floods. Prior to the flooding, Nebraska Farmers Union President John Hansen predicted that banks wouldn’t renew 2018 operating loans for about 10% of the state’s farmers.

In the dark hours before the water rushed in, Greg Beebe moved his calves to higher ground. When the waters receded, his cows had survived. “Many other farmers were hit harder,” he says.

Regaining solid financial footing will be a long, hard slog for all U.S. farmers. Where will they find higher ground until the water recedes? 

Even if trade uncertainties are resolved in 2019, grain inventories are likely to drag down prices. Land values will be pivotal. 

“A major reason values haven’t collapsed is because land is owned by baby boomer farmers late in their farm cycle,” Kohl says. “The duration of the current refinancing cycle will be a key factor. Ongoing restructuring could increase land on the market.” 

In the months ahead, Beebe will focus on what he can control. He’ll spend the summer rebuilding all of his fences, establishing cover crops, clearing trees and debris, and replacing drive motors on center pivots. 

“Tight finances will be a challenge,” he says. “We’re grateful for the support of our community and the larger networks of volunteers keeping us afloat,” he says.

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