Minding Ag's Business

Preventing Big Farm Failures

By  Marcia Zarley Taylor
Big renters need big cash cushions in case of weather or marketing disasters. In this projection, based on average costs in southern Minnesota, Craven found many price and yield scenarios where a 10,000-acre corn farmer paying $400 cash rent could lose nearly $1.4 million in 2013. That's after accounting for claims on an 80% Revenue Protection policy. (Chart courtesy of the University of Minnesota)
Big renters need big cash cushions in case of weather or marketing disasters. In this projection, based on average costs in southern Minnesota, Craven found many price and yield scenarios where a 10,000-acre corn farmer paying $400 cash rent could lose nearly $1.4 million in 2013. That's after accounting for claims on an 80% Revenue Protection policy. (Chart courtesy of the University of Minnesota)

MILWAUKEE (DTN) -- Ag lenders are raising the caution flags on juggernaut farms -- cash grain operators who rent most of their land and whose rapid growth spurts have pushed them beyond 10,000 acres in many cases.

Farm lenders attending the national ag bankers conference last month jammed sessions where experts put such "go-go" operations under the financial microscope. Some instructors blamed lax credit analysis for Midwest farm bankruptcies in the last year, where liabilities jumped to $50 million or more, leaving banks as unsecured creditors.

"Crop producers have been flying high for the last five years. Now we wonder how it's all going to land," said Robert Craven, director of the Center for Farm Financial Management at the University of Minnesota.

The largest 20% of operators in his database "have really taken off" in size and revenues, compared to the rest of the pack, since 2007, he noted. But that growth poses some serious risks when extreme weather shaves yields below expectations, as the Eastern Corn Belt experienced this year. Parts of Illinois have harvested three straight years of subpar yields.

Someone with average cash rents of $400/acre can't afford major yield losses under virtually any yield scenario when he averages only $5.50 a bushel for his crop next season, if his input costs run about average for southern Minnesota, Craven said. 

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He simulated 2013 returns for a 10,000-acre corn grower with $400 cash rent and an 80% Revenue Protection policy to illustrate. At 192.5-bushel yields and $5.50 a bushel, the grower would make about $800,000, but at 140-bushel yields he'd lose $1.386 million. Double that exposure for a 20,000-acre grower.

"You can go-go both ways," Craven reminded lenders. He recommended that bankers look for multiple business entities with different fiscal years, since that can mask an operation's true position. He also suggested that vulnerable growers focus on adequate insurance coverage and building working capital levels. Normally, working capital (liquid assets) should run about 38% of gross income, Illinois studies show.

But growers who rent more than 85% of what they farm need to be stashing away much more liquid reserves than those who own large tracts of land, typically 40% or more of their land base, cautioned Shawn Smeins, managing director at Rabo AgriFinance. He thinks lenders want to see some hard-earned net worth backing up the business, in addition to positive income projections.

One of the items Smeins recommends is a cushion of $300/acre of working capital for big renters, vs. $200/acre for those with a large owned-land base.

"Typically the landownership model has a more stable cost projection into the future as it relates to land costs vs. the historical trend traditionally of rising cash rents over the long term," he told DTN.

Land owners have already put much of their "equity cushion" up front, he noted. "The banker typically gets more comfortable with this equity cushion vs. the perceived liquid collateral margin during these more volatile times," Smeins added. "Yes, land values could decrease and cause some issues, but over time there is more risk of rising costs and volatile commodity prices that can turn the table negative for a heavy cash renter than decreasing land values for a land owner."

Read and comment on all DTN Ag Business Benchmarks on the Minding Ag's Business blog.

Follow Marcia Taylor on Twitter@MarciaZTaylor.

(SK/CZ)

© Copyright 2012 DTN/The Progressive Farmer. All rights reserved.

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Big renters need big cash cushions in case of weather or marketing disasters. In this projection, based on average costs in southern Minnesota, Craven found many price and yield scenarios where a 10,000-acre corn farmer paying $400 cash rent could lose nearly $1.4 million in 2013. That's after accounting for claims on an 80% Revenue Protection policy. (Chart courtesy of the University of Minnesota) 
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Comments

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Lon Truly
12/19/2012 | 6:47 PM CST
See http://www.aberdeennews.com/news/aan-column-congressional-proposal-just-insane-20121215,0,3938965.story
Lon Truly
12/19/2012 | 7:20 AM CST
Bonnie - it works the same way with farmers being guaranteed a profit or receiving the largest investment guarantees by fci. Most of those with the largest insurance subsidies and the largest investment/profit guarantees are in the drivers seat.
Lon Truly
12/19/2012 | 7:04 AM CST
Bonnie - In regards to large or small farmers make you sure that you read pages 23-24 of the gao report. Higher land prices negatively affect small farmers because of unbalanced distribution of government subsidies. Why you like having to work harder for less profit potential is beyond me.
Bonnie Dukowitz
12/19/2012 | 7:03 AM CST
I agree with much of your analysis Lon. However, one needs to take a deeper look. Insurance subsidies are not paid to farmers of any size. The insurance companies which are mostly owned by the banking industry are the entity being guaranteed a profit. The worlds money does not differ large or small, nor does the money care, as long as profit, control and power is the result. As long as food producers are fighting among themselves, those in control can sit on their throne and watch the game.
Lon Truly
12/18/2012 | 7:12 PM CST
Bonnie- Granted there are many factors including changes in technology, but before the government got involved in saving the family farm business this country had zillions of farmers from coast to coast. Now we have government bureaucrats being paid millions if not billions, 16 trillion in debt, government targeting the largest farms with billions in investment/profit guarantees, some farmers receiving million dollar plus annual insurance subsidies, and extremely narrow margins of profitability due to government assumption of production and marketing risks driving land prices skyward. You can rest assured that collectively many farmers are billions of dollars ahead ahead with indemnities versus premiums. Check out http://www.gao.gov/assets/590/589305.pdf
Bonnie Dukowitz
12/18/2012 | 5:37 PM CST
Lon, Could you please describe or define , smaller farmers, larger farmers, high rollers, marginal areas, etc. Please be specific. As we farm over 500 acres in lighter soils and sell some corn to an ethanol plant, are we large or small farmers? Is New Orleans and New York marginal because of floods and Iowa, Illinois and Indiana marginal because of drought? How many bushels per acre, proven yield, does one need to not be sub-par? We are behind on crop insurance, premium versus claims, where does that place us on your scale? For what it is worth, to me, crop insurance is the closest thing to sensible as far as government involvement in anything, there is. I agree, government itself is an issue, but untill you put down numbers supporting your critique, your argument is sub-marginal.
Unknown
12/18/2012 | 2:08 PM CST
One has to wonder about the validity of fci claims from operators who farm in many counties and have the equipment to move grain long distances. I hear from adjusters who suggest that the potential fraudulent claims are a huge problem. I suspect that there are many claims in that $190,000 per entity range this year.
Lon Truly
12/17/2012 | 1:38 PM CST
Unk. - Many large operators have minimal land costs. Most large operators have major land costs. Hope you can comprehend. Government has no business guaranteeing returns to land whether they are major or minor. Obviously government has not the ability to fund present spending levels with tax revenues. Not all small farmers favor fci. The same view is also shared by some large operators. I guess you do not realize the degree of my success in farming USDA programs including fci. Try jumping to conclusions less often. Do you really think government can afford to and should be subsidizing the production of all crops in all marginal areas? Perhaps the consumers should be required to pay more for food in times of lessor production rather than the taxpayer paying billions through government insurance schemes.
Unknown
12/17/2012 | 12:24 PM CST
Lon, I guess since larger operators don't have much land cost to worry about, there's little stopping you from getting in the game with them. Step right up to the craps table and place your bet if you think it's so great. I'm still failing to see your "targeting" argument. I don't recall too many policies that indicate unbalanced support in favor of "larger" farmers. Direct payment limits come to mind. Still haven't seen your case for "unfair" crop insurance. If you buy the 85% policy, you paid a healthy premium for that coverage. A premium in most years is money spent with no claim paid. This all comes down to choices that everyone has to make. How "good" of insurance do I want to buy? By the way, if you choose to buy 85% coverage, your taxpayer funded subsidy is nill. If I bought a 70% revenue assurance policy (a balanced farmer/taxpayer cost) and filed a claim, didn't I miss out on 30% of my potential revenue. Did you give up 30% of your take home pay? Oh wait, maybe you only bought 60% coverage while your neighbor bought 85%. He gets a check, you don't. Hence the anger. Still comes down to choices that get made and not government intervention. I get that you're not a fan of taxpayer subsidized crop insurance, but how many acres would be in production without a reasonable cost insurance program? None of the fringe areas, simply because of weather. Yet, it was these fringe areas that keep this year's production at a reasonable level. In the big picture of national food prices, was this not a worthwile investment from a taxpayer point of view?
Lon Truly
12/17/2012 | 10:44 AM CST
The clueless and or corrupt congress ever fixated on re-election has chosen to be oblivious to the economic carnage it is creating with the unfair and inequitable crop insurance schemes. It should be obvious to everyone that targeting the largest and most profitable farm businesses with the largest investment and income guarantees grants these operations with an overwhelmingly competitive edge in a highly competitive business. It should be noted that many of these operations have little or no land costs and that government has no business guaranteeing ever increasing land values with insurance schemes that cover land costs. It should also be obvious that smaller farm operations targeted with no or minimal government benefits have little or no chance of competing in such an economic environment. Considering the stratospheric levels to which land values have escalated it should be obvious to all that extreme government income and investment guarantees are capitalized into land values and that government has no business targeting the wealthiest with multi million dollar business benefits.
Lon Truly
12/17/2012 | 10:24 AM CST
If fci does not unload risk from farmer to taxpayer, why do we have it? I never said anything about fci guaranteeing profitability forever to all farmers did I? I said "with current government insurance schemes and current prices". Any idiot knows just about everyone that can is farming the government crop insurance guarantees available to farmers and than that has a whole lot to do with the ever increasing costs of production. If RFS has no effect on anything, lets get rid of it. If ethanol was such a wonder fuel why doesn't readily available ethanol fuel ethanol plants as well as all universities? Your red herring regarding insurance premium subsidy percentages is totally irrelevant since it completely ignores the total value of insurance benefit available to different farmers. Previous stated arguments have been made why targeting massive insurance benefits to a select group of individuals is insane. Read above. You are dishonest if you cannot admit that fci is not guaranteeing profits to individuals with minimal land costs. If your statement was true individuals without land costs would have no reason to purchase fci. The problem is not just that larger farmers receive a larger insurance subsidies but also that many larger farmers are receiving massive investment/profit guarantees.
Unknown
12/17/2012 | 9:07 AM CST
Let's cover a couple of facts here. First, the market does currently determine the price of corn based ethanol. There are no subsidies or import tarriffs left. Yes, the RFS is still in place, but given the perfect opportunity to waive it, most economists and the feds said the market impact would be a couple % price drop. Big deal. The market moves that far on its own on a daily basis. If you don't agree with the economics in my case, why can we export ethanol at a profit, without subsidy - so much to the point that the EU has to consider a tariff on US ethanol imports to stay price competitive. Second, mostly directed to Lon, your arguments and anger are way off base on crop insurance. The premium subsidy percentage for the SAME revenue assurance schedule of insurance is the SAME regardless if you farm 5 acres or 50,000. Also doesn't matter what agency you work with. The program structure is the same. The only choices you have are coverage percentage (60-85), trend yield (Y/N), harvest price (Y/N), etc. Everyone has the same choices to make. There is no volume discount available - period. Does a 50,000 acre farmer get a bigger $ based subsidy? Absolutely, but the % is the same, and I guess I'd love to hear your argument why it shouldn't be. Third, if you're naive enough to think crop insurance guarantee's a profit, shame on you. Spend a little more time on your numbers. If someone bought their land 15 years ago, it's that currently discounted land cost that's guaranteeing them a profit, not crop insurance in itself. If you genuinely think that anyone in any business can offload their risk to someone else, and be guaranteed a profit year in and year out, come on.
Brent Heid
12/15/2012 | 6:19 PM CST
I think that I understand the "greedy" definition. It just seems to a fine line between greedy and financially astute with some people. Having an entitlement culture is another thing altogether. I truly believe that many rich, white farmers have more of an entitlement mentality than the urban poor black folks on assistance. Case in point ethanol subsidies, direct payments,etc. Just mentioning letting the MARKET determine the price of ethanol and you hear corn growers squealing like greedy pigs about their entitlements. If that is what you meant, Bonnie, by greedy, then Amen.
MARCIA TAYLOR
12/14/2012 | 3:46 PM CST
Every industry needs to attract ambitious, goal oriented operators who are willing to take risks. Let's face it, the Michael Jordans make the rest of the team better athletes. But what I think financial analysts point out is that high velocity growth and high cash rents make high fliers more vulnerable to crashes when prices or yields dive. Play out some of those worst case scenarios and then plug the gaps with better marketing. There's alot of red ink the government doesn't protect, even with crop insurance.
Joe Smith
12/14/2012 | 10:46 AM CST
with the price of corn or soybean and all the goverment new bills it will be difficult to manufactured in USA any meat protein at agood price.
Bonnie Dukowitz
12/14/2012 | 6:56 AM CST
Sorry Lon, Greedy is covetous. The use of the word is general.Legal is legal. You can certainly direct an opinion to where ever you like. My use of the terminology was directed at everyone.I do not know anyone who told a purchaser, You are paying me too much! It is healthy for all of us to assess, with-out bias and pointing a finger at others , our own attitudes and personality once in a while. For what it is worth, we are small farmers and purchase some crop insurance. Can't get an input loan without it.
Lon Truly
12/13/2012 | 5:52 PM CST
The term greedy is directed at everyone pandering and lobbying for continuation of government programs that target those with the greatest probability of the greatest profits with the most government subsidies and the largest government investment /profit guarantees. Greedy is not keeping what you have rightfully earned. Greedy is using government to grab what other people have rightfully earned.
Bonnie Dukowitz
12/13/2012 | 3:31 PM CST
Brent, The term "greedy" was not referencing anyone or any group. The reference is ALL.
Brent Heid
12/13/2012 | 2:54 PM CST
This is a small thing---but I really dislike the term "greedy" when referring to larger operators. Those people farming 1000 acres were the "greedy ones" back in the 50s and 60s. Now we are all righteous? Those larger operators are definitely risk-takers and love a challenge and love to roll big---but that does not necessarily make them greedy. Just a different business model. In our area, most full-time operators are into about 2500 acres. A 1970 mega-farm.
Campbell Ian
12/13/2012 | 9:48 AM CST
Interesting that most of the "leading" young farmers profiled in yesterday's Progressive Farmer were of the juggernaut class. Suppose they are the ones of most interest to the advertisers.
Bonnie Dukowitz
12/13/2012 | 6:17 AM CST
All topics of discussion. One might want to include that too many land owners will sell out their current renter(small or large) for a few bucks. Then get into a car and drive a hundred miles to a mega-mall(financed with a government subsidized gimmic) in order to save a nickel on a roll of toilet paper. Consquently selling out the local retailer. All then reference this waste as a healthy gross domestic product. Maybe we are all just greedy.
Ric Ohge
12/12/2012 | 9:36 AM CST
The Government's shameless pandering to Corporate Giants has made being a Small Farmer(Read: Family-Owned/Rural Small Business)very difficult at best. Worse yet, it's set the entire industry up for a monstrous epic fail. I've been "preaching" this message to Area Chambers and Business Groups for years-generally to deaf ears. In Small towns, it's tempting to keep one or two major concerns running able to employ 1/2 or more of the resident population. Larger Businesses/Industrial Farms have distinct advantages are Chambers and Cooperatives should be availing to it's smallest and newest. So far, it hasn't happened. As predicted, as Business, and now Farming, has become "Super-Sized", it's set itself for a Super-Sized Implosion. If you have thousands of small businesses/farms and even 25% of them wither downsize or fail, you have a bumpy economy, but one a bit easier to steer back on track. If you have a mere handful of HUGE Businesses/Farms imploding, you have a disaster. I wonder when anyone will listen to this and act...not likely in my lifetime.
Lon Truly
12/12/2012 | 7:24 AM CST
Perhaps congress is being highly irresponsible by granting a few high rollers annual million dollar insurance subsidies in addition to multimillion investment/profit guarantees. It is truly pathetic the many beginning and smaller farmers being denied opportunities to farm by congress recklessly targeting the greediest and largest with the most insurance benefits.