Minding Ag's Business

Given the abrupt drop in commodity prices this year, "the solvency of some farm customers could shift quickly," David Lynn, a senior vice president for Farm Credit Mid-America cautioned ag economists attending a conference in Louisville this month.

Indeed, University of Illinois economists now estimates 2014 gross revenues in northern Illinois will run about $300/acre below the 2011-2013 average of $1,100/acre. That's even counting robust yields, which won't totally compensate for the steep collapse in corn prices this season. Projections for 2015 look worse, although it's still early in the process.

Lynn urges his association's 97,000 farm customers to be proactive about this reversal of fortune and to develop habits that will persuade lenders they remain good long-term risks, even if potential 2014 and 2015 losses reflect a temporary setback.

One grower he visited recently opted to let a farm go in another state in 2014 because the cash rents were excessive in relation to current commodity prices. Simply put the rent exceeded the grower's threshold for what he felt he could pay as a percentage of the gross income per acre while providing a satisfactory return. "Lenders like to see producers maintain that flexibility with their operations," Lynn says. Among his recommendations:

--Develop a five-year plan for your business. While there's much uncertainty in the farm economy, set goals for your operation. Plan for 2019 now.

--Put your farm financials through contingency plans for multiple scenarios. For example, what happens if the season-average corn price is $3.10 instead of $3.70?

--Communicate your succession plan. If you don't have a family member following in your footsteps, what is your horizon and your exit strategy?

--Always look for opportunity. Rapid change creates opportunity.

--Prepare cash flows for multiple events, such as an increase in interest rates and lower grain prices in 2015. "Ten-year T-bills are as low as any time since World War II," he says. "We think rates will stay that way through the end of the year, then start to climb in 2015. They could be up 200 or 300 basis points in 24 to 36 months, but they would still be among the lowest rates ever."

--Establish adequate working capital. That likely means setting a line of credit in advance of when you need it. Many farmers fail to understand the importance of properly balancing short-term, intermediate and long-term debt. "During times of strong farm earnings producers often use their cash to pay for short- and intermediate-term assets and to pay off long-term debt," he says. "Within 24-36 months, if there is significant stress on farm income, they may experience a cash flow crunch and thus their financials may stressed in regards to extending more credit."

--Fix interest rates for the term of your loan. Besides fixed-rate mortgages, FCS Mid-America is currently offering one-year fixed rates on operating line of credits as low as 2.99%. Historically, the average operating rate is closer to 6% to 8%. "When rates start to rise, it's too late to take advantage because markets move too fast," he says.

--Manage risk with forward pricing and crop insurance. In the drought of 2012, 93% of FCS Mid-America's customers triggered crop insurance claims. "It's an even more important risk management tool in times like this since it provides certainty and confidence in planting decisions," Lynn says. "It helps insure that farmers can recoup their input costs."

As an example, in Christian County, Ky., it cost about $525 per acre for corn input costs, versus $20 to $25 per acre for crop insurance. Lynn says, "That's 4% to 5% of input costs, so from a farm lender perspective, the question is how can you not?"

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