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KANSAS CITY (DTN) -- Just because you pay all your bills on time does not mean you are financially stable. That was the gut-punch lesson Nebraska farmer Don Cantrell learned while farming through the 1980s.
"I had no idea how much debt was too much, and I didn't know the bank could call a loan even if your payment was current," said Cantrell of Merna, Nebraska. Now that grain agriculture appears headed for an extended rough patch, Cantrell makes sure his son and farm partner, Kyle, 36, incorporates the lessons Cantrell learned the hard way.
No one is predicting as severe a financial crisis as agriculture experienced in the 1980s. But USDA forecasts a 32% drop in net farm income for 2015, the second year of what could be a string of three or more years of losses for crop producers, ag economists forecast. Ag lenders already are gearing up for serious discussions with their borrowers this fall and winter (see related stories on DTN's Farm Business page).
Many of agriculture's newcomers could be in for a shock, worries farm consultant Moe Russell with Russell Consulting in Panora, Iowa. "There are a lot of young operators who don't have a clue what it's like to operate with big negative margin," he said. In contrast, problem loans were common during the debt crisis. By the 1986 peak, farm delinquency rates ran 49% at Farmers Home Administration, 20% at life insurance companies, 12% at the Farm Credit System and 10% at commercial banks.
One of Cantrell's 1980s nightmares was relying on a bank that bumped up against regulatory limits because it was too small to finance his full credit line. In that case, bigger banks typically help cover a large loan initiated by the smaller lender. The downside is that it can shuffle credit decisions to strangers on a loan committee in a distant city.
"My advice to young farmers: Run as hard and as fast as you can away from an over-line loan participation. You are playing with dynamite," said Cantrell. "A participating banker doesn't know you, doesn't care, doesn't tolerate risk and will cut you off in a second."
Cantrell doesn't know exactly why his lender slashed his loan request, but if he wasn't technically broke, he was awfully close. "My banker said to me, 'I will lend you $500,000 out of the $1 million you need; you decide what you're going to do,'" he recalled.
"They didn't tell me how to cut my debt, they just gave me half of what I needed. I was able to keep my land and cows, but it was tough," he said. "I should have done what my neighbor did who was a bit older than I. He sold two quarters when his debt was high, reduced his debt and then when things turned around, started buying land again."
From that lesson, Cantrell learned to keep his short-term debt at a minimum. "I now carry only a very small line of credit. Most years, I have excess cash. I may lose a little in opportunity, but I don't care. I sleep at night. And we have been growing our operation," he said. He and Kyle now farm 5,400 acres of corn and soybeans plus 3,000 acres of grass. In 1985, it was about 1,200 acres of corn and soybeans.
When you are facing large negative margins, you have two alternatives, noted Russell. "You've either built up enough working capital to survive, or you have to make drastic changes in your lifestyle and operation."