Ready for Ag’s Reset? Multi-Year Losses Take a Toll
Posted On May 11, 2016
Agriculture is in the midst of an economic reset that will thin the ranks of some of the largest farm operators but offer growth opportunities for those who have patiently held on to cash. That was the counsel from Dave Kohl, a professor emeritus in ag economics from Virginia Tech who spoke to the 2017 The Executive Program for Agricultural Producers (TEPAP) class in Austin this week.
“Most lenders haven’t seen their customers’ financials for a year, but when they do, some will be saying ‘Oh my God,'” Kohl said. Jan. 15 through April 15 will be a critical time for lending renewals, he added, with more and more stress appearing not just for farmers, but for suppliers like machinery dealers and cooperatives.
The ag finance expert likened the situation to inning four to six of a baseball game. After experiencing cash flow issues and serious profit margin declines in 2013 to 2015, farmers are “calling in their working capital” as their relief pitcher and draining much of their liquid assets. If losses continued in 2016, operators will need to dig deep into their core equity and use their farmland wealth to stay in good standing for their next credit renewal.
The segment of production agriculture that Kohl worries about most are those operators with sales over $1 million who expanded rapidly during corn’s Mount Everest profits. Those who grew largely on rented land have little recourse if they can’t show repayment capacity and collateralize their credit with assets like farmland now. “Farmland equity is a lifesaver in periods like this,” Kohl said.
Kohl cited a study from the Center for Farm Financial Management that compared the top 20% of that size farm operator with those in the bottom 20% category. There was not much difference in profitability at lower income levels, but top operators at the $2 million sales level averaged net incomes of $578,000 in 2015 while the bottom 20% lost $332,000, a difference of $910,000.
“There are some big farmers headed for big problems,” Kohl concluded.
One big distinction from the 1980s is that about 10% to 12% of farms carry two-thirds of the nation’s farm debt load, he adds. “Now debt is very concentrated in larger farms,” he said. “Some of them added acres faster than they could grow their management abilities.”
Ag stress isn’t uniform throughout the country, but is showing up in higher-risk farming areas first, such as Texas, parts of the Delta and even parts of the Dakotas, he said. One Arkansas lender in the audience told DTN that a large investor-owned parcel above 3,500 acres was never planted in 2016 because the previous tenant refused to pay what he considered excessive cash rent, and a backup renter couldn’t find financing.
Turnover in agriculture is underway, both from financial missteps and from early retirements, Kohl noted. Growers who sat on cash the last few years and who have realigned their costs to low levels “should have more opportunity to expand the next four or five years than they have in the last 15,” he said.
It is a lesson on why lenders and ag economists stress the necessity for keeping high levels of liquidity in ag businesses, so they can weather cycles. Kohl likes to see operators who carry at least 33% of their expenses as working capital. He also recommended keeping the right kind of liquid assets which can be easily converted to cash in the midst of a downturn. Frequently, inventories and equipment decline in value, just when you need their funds. So he recommends that 15% to 25% of current assets be held in cash accounts, even if they receive miniscule interest at the bank.
“If you can buy an asset for 60 cents on the dollar [during an economic reset], that idle cash earns you a lot of money,” Kohl said.