Can You Restructure Your Farm Debt to Survive Lower Grain Prices?
For grain farmers, cash and operating capital are critical right now and will continue to be for some time, as grain prices fight for any bit of bullishness they can muster amidst continued speculation that the 2014 crop is a monster that can easily feed the demand that's out there right now. That doesn't mean you're totally bound to lose money in the next year or so, though. It will just require a few changes to the way you manage that operating capital, two economists say.
Monday's USDA Crop Production report showed there's not as much wiggle room between current production estimates and projected demand, both domestic and abroad. So, there's reason to be optimistic that profitability could be in the cards again in the next year, though it might come toward the end of that time frame, say two Purdue University economists.
“World grain supplies are adequate, but they are not at surplus levels. This means prices can recover with smaller production, or over time as usage builds,” says Purdue University ag economist Chris Hurt. "Historically, the market has gone through boom and bust cycles. This looks more like a boom-moderation cycle. Most farm families will be able to adjust, but they will have to make changes."
Right now, it's best to plan on $3- to $4-per-bushel corn prices and soybeans around $10 a bushel and also do everything you can to preserve operating capital and stay liquid with cash on hand, says economist Michael Boehlje.
"The message right now is to maintain your liquidity and protect your working capital,” Boehlje says in a university report. “That means holding onto your savings and keeping a very close eye on your bottom line.”
This plan is based on what Hurt says will likely be a year ahead with corn prices struggling to neck past $4 a bushel and soybeans hovering around $10 per bushel.
“Current futures prices are suggesting that over the next few years, we may see corn prices average near $4 a bushel and soybeans around $10 per bushel,” Hurt says. “Total costs of production today are closer to $5 for corn and $12 for soybeans. So, significant downward adjustments will need to be made in costs, or market prices will have to recover."
Easier said than done, right? There are a couple of components to the equation that could work in grain farmers' favor through the next year. Take big-ticket farm purchases, like machinery. Hurt says in his state of Indiana, a lot of farmers have ridden the most recent years-long upward trend in grain prices to get those big-dollar purchases made. Not having to worry about buying a new tractor, combine, or pickup should help with overall financial balance while grain prices are on the low side.
"Many farmers bought new trucks, tractors, or combines over the past few years, so the good news is that they don’t have to worry about replacements,” Hurt says.
The best potential way to chip away at the current gloomy profit picture is through debt restructuring. Will your lender let you take short-term loans or purchase agreements and roll them into longer-term deals that can cut your monthly payments? With as common as tight budgets are for crop farmers these days, some ag lenders may not favor that idea, but it's worth at least looking into, Boehlje says.
"If you have short-term loans, leases, or purchase agreements, talk to your lender and see if you can extend the term to reduce your monthly payments," he adds. "Many lenders have become risk-averse in this environment and might not be willing to refinance, but it would be a good idea to look into the possibility as soon as possible."