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Why Your Lender is Asking About Working Capital

Form a financial stress test before your lender – and the lender’s regulators – ask you for one.

If your lender has been asking you about your working capital lately, there’s good reason. That’s because working capital – current assets minus current liabilities – is much lower among many farmers this year than in years past.

“The magnitude of working capital drawdown is substantial,” says Jim Mintert, director of Purdue University’s Center for Commercial Agriculture. “In the Corn Belt, farmers built up working capital from 2007 to 2013. They have been drawing it down the last few years. If the burn rate continues as it has in recent years, they will face real challenges with their lenders.”

Why the Question?

The reason lenders are asking about working capital is because regulators are asking about it. So buckle up. It could be a tough next few years, says Jason Henderson, Purdue University associate dean and Extension director.  

One challenge is that not many bank regulators have a farm background, Henderson says. They do, though, carry memories of working through troubled housing loans during the fallout of 2008’s financial crisis.

“So when they look at agriculture as a real estate loan, what do they flip to? The housing crisis,” says Henderson.

What do you do?

Get your house in order before regulators start asking questions about your loan portfolio. Regulators will ask lenders about financial stress tests and models, says Henderson.

Be ready and form your own financial stress test. For example, what happens if corn prices don’t reach your break-even point? Or what happens if interest rates rise three times? What will your response be?

“Also, think about upside scenarios,” says Henderson. Form a plan on how you will take advantage of commodity price upticks during the year.

Mintert says looking at records from state farm-management associations can provide benchmarks for your farm. “Ask if you have lower cost of production than competitors,” he says.

Attending conferences such as Purdue’s Top Farmer Workshop can also help you glean ideas for keeping your farm competitive.

Other ways to keep your farm competitive include the following.

  • Scour machinery purchases, if there’s a need. The panel says good machinery buys are one upside to a down economy.
  • Consider diversifying your crop mix. “There may be an advantage for growing milo in some parts of the country,” says David Widmar, Purdue University agricultural economist.
  • Explore alternative markets. “People are asking us about organics because of the margins,” says Henderson. “It is not for everyone, but we have been getting questions asking about the value-added opportunity.”
  • Be open to expansion opportunities. For example, there may be a retiring farm situation where no family member will take over the farm. Or, there may be a situation when a farmer is not yet ready to retire but is not exerting the same physical effort he or she used to. “Maybe it starts out as a partnership and evolves into an acquisition strategy,” says Mintert. “For the short run, tackle it from the other’s perspective. Put yourself in his or her shoes.”
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