Beating Credit Challenges

As farmers face the fifth year of a downturn, prices remain mired below the cost of production. "It's a liquidity crisis, but solvency is solid," says Michael Langemeier, associate director, Purdue University's Center for Commercial Agriculture in West Lafayette, Indiana. "Many producers are using noncurrent assets like land to infuse liquidity. For others, low liquidity and high solvency leave them very little room to maneuver."

Purdue estimates a $2.47-per-bushel variable cost to grow corn on average productivity soil. "Indiana cash rents are flat to 5% lower than 2017," Langemeier says. "Cash rents and fertilizer have the greatest potential for declines. Herbicide costs are increasingly challenging, given problems with residual weed control."

Cash-flow scenarios

Although the average farm debt-to-asset ratio remains stable, low working capital is eroding equity. Creighton University's December Rural Mainstreet Index reports that 53% of bank CEOs in a 10-state region including Illinois, Iowa, the Dakotas, Colorado, Wyoming, Minnesota, and others, confirm increased collateral requirements.

At the Kansas Ag Mediation Service, Dave Kehler and four other farm analysts meet one-on-one with farmers, using FINPACK programs to identify cash-flow scenarios that give them a fighting chance.

FSA guaranteed loans are part of their financial arsenal. "If farmers qualify for refinancing through FSA and they're close to cash flowing, sometimes we can take equipment loans up to 15 years – if there's enough equity," he says. "The bottom line is that FSA can't make a loan unless it cash flows."

Kansas FSA farm loan chief Bob White agrees. "We loaned $265 million in fiscal 2017, a record-breaking volume for guaranteed and direct loans," he says. "That's up from $225 million in fiscal 2016. We're hearing substantial interest as we head into spring."

Lenders have turned down other farmers and ranchers. "A significant number may not have their operating notes extended," Kehler says. "The first wave has refinanced and has little equity. A larger group is asset rich and cash poor. They don't have working capital, and they have to borrow 100%."

credit sources

As commercial banks pull back, more farmers are turning to multiple credit sources. John Deere currently is the fifth-largest ag lender in the U.S., according to the American Bankers Association. In addition to equipment financing, it underwrites short-term capital loans for seed, chemicals, and fertilizers. These credit accounts have risen 38% since the end of 2015.

Ag Resource Management (ARM) offers loans directly or in conjunction with local suppliers or lenders. It's added four to five locations annually since its launch in 2009. Today, it has multiple branches in 12 Midwestern and Southern states. "Our strong suit is operating capital," says Billy Moore, Atlanta, Georgia. "We loan on the value of the crop, crop insurance, and government subsidies. We don't encumber other assets."

ARM also sells crop insurance, which is integrated into operating loans. Its approval process takes only 72 hours, but interest rates may be higher.

Transparency is an issue with multiple creditors, Langemeier says. "It's increasingly challenging to know where farmers are holding debt. Does the lender have a total picture?"

Kehler says, "Producers do whatever it takes to keep farming. The average Kansas operation can sustain itself, but it can't handle family living or outside expenses. Banks can encourage farmers to analyze their operations while they still have equity. We're having some success. Sometimes it's helping with a dignified exit plan."

He adds, "Farmers need to take a hard look at cash flow and budgets – not just keep doing what they've been doing and expect it to be different."