Category: Industry News

February 28, 2022 – Fort Worth, TX

One of most frequent questions that Ashley Arrington, Real Estate Division Manager at Ag Resource Management (ARM), gets asked as she’s talking to farmers is “Where are interest rates heading?”

While long-term fixed rates have already started to see an uptick, prime hasn’t jumped higher just yet.

“We’ve seen a little bit of an increase on the short-term loans, but nothing like we have seen on a 30-year fixed loan which is somewhat of a predictor of what we think the market’s going to do over time. We expect rates are going to rise higher in the long-term, than the short-term interim,” said Arrington.

The next question she’s asked is “What can I do about rising interest rates?” None of us have the power to stop rates from increasing, but you can consider proactive actions to help protect your financial interests. Think back to 2012-2013 – that was the last up cycle in commodity prices, and a lot of land was purchased around that time. Many of those loans are now coming up for renewal, so those are important to look at right now.

“Even if it is another year or two before your loan matures, it’s a good time to take a look and explore your options, regardless of if it costs more in the short-term,” she said. “If you’re locked in at 3.8% but your loan doesn’t mature for another 18 months, it’s worth looking at locking in at 4%, which is 20 basis points higher. Because in 18 months, there’s a good chance that rates are going to be a lot higher. The indication from the Federal Reserve is that there could be as many as four to five rate hikes this year, and they have said that it may not be a 25-basis point (0.25%) hike at a time – it could be 50 basis points (0.5%) at a time.”

For example, if you’ve been renting ground and have spoken to the landowner about purchasing the ground in the next few years, now may be the time to make the purchase. If you wait two to three years then make a move to purchase and finance it, the interest rate could be significantly higher. Land values are also high, and land values and interest rates are typically correlated.

Interest rates are headed higher due to inflation in the market. Higher inflation is impacting everything from the housing market to items you buy at the grocery store to input costs for crop farmers. Inflation is inherently tied to interest rates, and they work like checks and balances for each other. Historically, when land prices hit a certain level, interest rates are going to move higher.

“We’re seeing a lot of inflation in the market right now, and the only thing keeping land prices at bay is interest rates. If there’s a rate hike of 100 basis points from where they are now, we may see the top end of the land value bubble. Look to get land purchases completed and refinancing done ahead of that,” Arrington said. “Speaking to experts in the industry, many say when we hit a hike of 200 to 250 basis points, that’s the trigger for the land value bubble to pop.”

Rented land should also be monitored as interest rates move higher. Rents will inevitably move higher. More and more institutional land buying is occurring, and those buyers want to rent their land while seeing a strong ROI. If they finance a portion of the purchase, then their payment will go up so rental rates may start to climb.

“We’ve seen an increase in rental prices, not because of interest rates, but because of higher land and commodity prices,” she noted. “Next year, we’ll probably see increases related to interest rates, especially with farmland that is changing hands.”

To protect your financial interests, make plans to look at:

1) Refinancing any maturing loans – run the numbers and see if it makes economic sense to refinance before rates go up

2) Planned purchases – any purchases for the farm like land, equipment, vehicles, etc. that you had planned to purchase in the next three years

3) Operating loans – review your operating loan and ensure your lender offers fixed rate loans

4) Rented land – rental rates could easily go higher., so plan accordingly

5) Overall financial situation – do a stress test with what you have. For example, if you have real estate loans, what happens if rates do go up 200 basis points – how does that stress your cash flow?

Learn more about our real estate loan services by contacting your nearest ARM location.

Ag Input Costs Are On The Rise. ARM Has The Solution.

After seeing years of tightening margins, declining commodity prices and eroding equity,  Ag Resource Management (ARM) developed the Ag Input Loan to help bring equity back to farmers who need it through a partnership with ag retailers and ag input distributors. Retailers have long-standing relationships with their customers, but they may be concerned about the credit quality or their cashflow and aren’t able to carry the farmer’s unsecured trade credit for the season. ARM can partner with the distributor, then take the distributor’s input sales and convert that to a secured loan transaction. This makes it part of an overall budget that ARM manages and monitors throughout the growing season.

 “Ag Resource Management pioneered the concept of monetizing crop revenue streams. By combining the math and science of determining both yield and price market values and their relative insurance values, ARM can reliably predict a farm’s potential revenue stream.” -Gerald Kruger, Director of Market Channel Development at Ag Resource Management

The retailer can then secure the sale of inputs to the long-term farmer-client and wait until the crop is sold for payment. They benefit from not having to carry accounts receivable on an unsecured trade credit status. They’ve now become part of a secured loan transaction because of their partnership with ARM.

As a forward-looking capital provider, ARM does not rely on land or equipment equity to make a loan decision. Rather, the loan decision is based on the farm’s capacity to generate an income stream from a growing crop. To do that, ARM uses a proprietary financial model to apply appropriate discounts, which generates a risk-adjusted crop loan that syncs with the farm’s budget. In the event of a crop failure, the revenue stream is protected with a well-structured crop insurance policy that maximizes farm revenue.

Once established, ARM sets up a systematic process to help manage risk on the loan by maintaining a close working relationship with the farmer. For example, ARM helps the farmer acquire the proper amount of insurance, spend capital on the inputs required to realize the highest potential yield and pay the loan when the crop is harvested. This in-depth involvement in the operation increases the chance of success.

Offering the Ag Input Loan benefits the retailer in two ways: they maintain the long-term relationship with that farmer, and they can offer a credit product that allows them to compete with other ag retailers that are trying to sell to the same farmer. However, the retailer has the advantage of shared risk with ARM, working under a well-documented credit structure.

ARM may also be able to help farmers who have filed bankruptcy.  ARM does this under special provisions and protection provided by the bankruptcy court.

To learn more, contact your nearest Area Manager or visit us at armlend.com/partners/retailers.

PARTNERING WITH BANKS

Bankers know the challenges presented by struggling farming operations. Look to Ag Resource Management (ARM) as a partner for creating strategies that manage risk for you and your farmer customers.

A troubled loan puts a bank in a precarious position: It must either refuse a request for additional funding or extend more capital into a loan that’s already troubled. Neither scenario holds much appeal.

ARM can help banks address efficiency and performance by managing some of the risk in their ag loan portfolio. ARM can offer alternative financing that allows farmers to plant their crops, move forward with the season and continue generating income — and the bank won’t have to advance further capital.

Banks have historically made operating loans based on real estate assets, but many farmers now own only a small piece of land and lease most of their acres. Because ARM relies on this season’s crop for collateral, ARM can take on the operating loan while banks continue to manage equipment and real estate term debt.

“Sometimes bankers need somebody to stand with them in order to provide the farmer an operating loan to farm that year — that’s where ARM comes in.” -Gerald Kruger, Director of Market Channel Development

BENEFITS FOR BANKERS

Partnering with ARM offers bankers many benefits:

    • Improve the balance sheet and financial performance.
    • Maintain relationships using a sustainable plan and without increasing commitment in a regulatory environment that may advise exiting the relationship.
    • Continue existing relationships in a tough landscape for finding new customers.
    • Reduce reputational risk. Offering a path forward shows that a bank wants to offer value to and help its farmers, thereby avoiding the appearance of marginalizing its farming client base.

ARM assistance creates a path forward for a troubled farming operation. Often, these clients just need to get through a rough spot. ARM can bridge the gap and give the farmer time, while helping the bank preserve the long-term relationship with that customer.

If the path forward for a farming operation is bleak, then ARM’s involvement for a year can offer everyone time to plan an orderly liquidation. The farmer and the bank usually come out better given the extra time. 

To learn more about how ARM’s solutions can work for you, contact your nearest Area Manager or visit armlend.com/partners/lenders.

AG RESOURCE MANAGEMENT COMPLETES LANDMARK SECURITIZATION FOR AGRICULTURAL FINANCE SECTOR

FORT WORTH, TX — Ag Resource Management (ARM), one of the nation’s top providers of agricultural lending and risk management services, announced that it successfully closed on the first securitization of its type in the agriculture industry. The 144A offering of $225 million crop loan backed notes serves as a milestone for ARM and the industry by accessing new sources of financing for ARM’s crop loan product.  Guggenheim Securities, LLC acted as sole structuring advisor and sole bookrunner.

“The past decade has been a challenging one for agriculture. Farmers need crop collateral solutions that work in a manner conducive to their success,” said ARM’s Chief Executive Officer, John Hoffman. He added, “Here at ARM, we are far from the norm. ARM is simply the smart choice for any farmer.”

The master trust securitization allows ARM to match fund its obligation to its farmers’ needs and to enable better execution, which will in turn allow further reach and more competitive capital solutions for the farming community.

“The successful completion of this inaugural asset-backed security transaction represents a significant milestone for Ag Resource Management in opening access to new sources of efficient capital that enables us to better serve the financing needs of farmers and agribusiness,” said ARM Chief Financial Officer and President of Capital Markets Rasool Alizadeh.

“Ag Resource Management’s goal has always been to keep farmers farming. It is a privilege for Guggenheim Securities to bring ARM to the debt capital markets through an innovative asset-backed security that helps ARM connect and partner with farmers across the country while also meeting the needs of the investor community,” said Cory Wishengrad, Head of Fixed Income for Guggenheim Securities.

The Secured Notes and the related note guarantees were offered in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and to non-U.S. persons in accordance with regulations under the Securities Act. The Exchangeable Notes and the related note guarantees were offered to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The Notes, the related note guarantees and any shares of common stock issuable upon exchange of the Exchangeable Notes have not been, and will not be, registered under the Securities Act or any state securities laws. The Notes, the related note guarantees and any such shares may not be offered or sold in the United States or to, or for the benefit of, U.S. persons absent registration under, or an applicable exemption from, the registration requirements of the Securities Act and applicable state securities laws.

This press release does not constitute an offer to sell or the solicitation of an offer to buy the Notes or any other security and shall not constitute an offer, solicitation or sale in any jurisdiction in which, or to any persons to whom, such offering, solicitation or sale would be unlawful.

About Ag Resource Management

Founded in 2009, Ag Resource Management (ARM) is a specialty finance company bringing financial and risk management solutions to farmers and agribusinesses. Our teams are highly specialized in agricultural finance and crop insurance. We combine that with proprietary lending technology and a deep understanding of crop agriculture to build a customized strategy for every farming operation. It started as just one office in the Louisiana Delta, and now, headquartered in Fort Worth, Texas, ARM’s footprint has expanded to serve customers from 29 field locations in 18 states. They are led by experienced leaders in the agriculture industry who are committed to every operation’s growth and success.

Media Contact:

Matthew Marr
mmarr@armlend.com
682-302-3361

 

SOURCE Ag Resource Management

There are a lot of mixed messages on the agricultural finance front these days. For example, on March 31, the USDA National Agricultural Statistics Service (NASS) released its 2021 Prospective Plantings Report, which said that U.S. farmers planned to plant an estimated 91.1 million acres of corn and 87.6 million acres of soybeans in 2021.

  • That’s less than 1% more corn acres than were planted in 2020.
  • That’s approximately 5% more soybean acres than 2020.

However, those numbers are also LESS than what the USDA had predicted growers would plant in statements made at the 97th annual Ag Outlook Forum, just a month before. The interpretation of the USDA announcement and the acreage predictions varied – some prognosticators said growers planting fewer acres than USDA thought in February would mean tighter grain stores and potentially sustained higher commodity prices. Others said the numbers showed intended plantings were not varied greatly from 2020, unsure if high commodity prices would be sustainable.

Other factors are adding to the turbulent dynamic in global agriculture:

  • Experts are still calculating the long-term effect of last February’s deep freeze, especially its longer effects on the fuel, rubber and plastics industries and any other manufacturing that is highly dependent on petroleum.
  • In some areas, interest rates, which for months had been at historic lows, are showing signs of creeping upward again – what does that mean for the nation’s crop producers?
  • Will the Brazilian harvest be good, bad or indifferent? How will that affect global commodity prices?

In the face of so much turmoil, experts advise growers to stick to best financial practices to allow them to navigate the potentially tricky waters of the upcoming growing season. We talked with Jason Brown, Area Manager with Ag Resource Management, and Ashley Arrington, ARM’s Real Estate Division Manager, about these practices, and here’s what they recommend:

Build Working Capital

Before taking on additional debt, analyze upcoming financial needs and expenses, and work on having enough cash on hand to deal with those “known quantities” without needing a loan.

“Having cash on hand allows a grower to take advantage of opportunities,” explains Brown. “This is especially important in times where commodity prices look good and opportunities, such as land acquisition, will pop up quickly and won’t last long. The grower with a solid source of working capital is going to be able to snap up those opportunities much faster than a grower who has to find financing.”

Restructure Debt

Growers have a tremendous opportunity to restructure debt right now, due to historically low interest rates combined with sustained high commodity prices. In this situation, loaning to growers looks like a good move for most financial institutions.

“Take a look at your debt scenario in terms of your long-term debt,” recommends Arrington. “You might have the opportunity to restructure debt and lock in a lower interest rate and lower payments. Restructuring debt now will help growers get through future downturns in the market by locking in those low interest rates and low payment schedules, which will help them navigate market ups and downs not just in 2021 but in coming years as well.”

Re-Evaluate Break-Even Estimates During the Crop Year

Both Arrington and Brown emphasize that with prices of so many inputs fluctuating, and some distribution chains still experiencing disruption, it’s important for growers to update and re-evaluate their break-even numbers and profit potential throughout the season.

“Growers who need an in-season input—such as a post-emergent herbicide, fungicide, insecticide or additional nutrients—might find that higher-than-expected prices might affect the break-even numbers they calculated back in December or January,” cautions Brown. “We work with our growers to look at that plan throughout the season and make adjustments if prices of needed inputs, fuel or other factors could affect their break-even and potentially, their profitability.”

For more information about how Ag Resource Management can help you with financial planning, financing and risk management, visit www.armlend.com.

So much about agriculture depends upon timing. And if you’re looking to get an operating loan, getting hung up for weeks, or even months, waiting for an answer can mean losing a lot of opportunities.

“Farmers need loans for a lot of reasons,” says Chad Hunter, area manager with Ag Resource Management. “For example, to fund rent, purchase seed or chemicals, fund labor, pay annual obligations such as taxes, you name it. The faster a farmer can get their operating loan in place, the faster they can go ahead and have the peace of mind of knowing they have the funds available to take care of those obligations.”

Having your operating loan quickly in place means opportunity for a grower. That might mean the chance to get an early order deal on inputs like fertilizer or crop protection chemicals, or seed. It might mean the opportunity to rent more land. It can also mean having the money ready when the planting conditions are right, instead of being hamstrung, waiting for loan approval.

“We talk about it in terms of opportunity cost,” explains Hunter. “Let’s say a grower wanted to plant corn, but his lender told him no, after a certain point in May. After a certain point in May, you lose your ability to protect that crop with crop insurance. So, this farmer is forced to plant soybeans instead. In this instance, the opportunity in corn was $150 potential profitability an acre, where in soybeans, that opportunity was only $50 per acre. So, his opportunity cost was $100 per acre. When you multiply that across 1,000 acres, that’s a lot of missed opportunity because he couldn’t get the financing he needed in time.”

Delays at planting time can result in genuine economic loss. According to data released by Pioneer during the 2021 Commodity Classic, growers can lose between .25 and .40 bushels per day in corn yield if planting is delayed after mid-to-late April. A 10-day delay from April 20th to May 1 could result in $24 to $40 of lost yield per acre.1

“Every day you lose after your optimum planting date, depending upon the maturity of your hybrid, you’re losing yield,” says Hunter. “With so many other pressures on a grower running up to planting time, being delayed in getting an operating loan shouldn’t be one of them. I had a grower who wanted to plant 1,000 acres who came to me, saying the lender was taking too long, and could I take a look at his situation. Three days later, I had an approval for him, and two days later, we funded that loan. So, he had the ability to go out and get his seed, his crop protection chemicals, make his planting plan and get that corn in the ground.”

That’s a prime example of one of the key benefits of working with Ag Resource Management (ARM)—speed.

“We’ve figured out how to leverage the crop and crop insurance, to maximize cash flow and risk management to provide a more streamlined underwriting and closing process, as well as a more efficient plan for the grower to use throughout the year,” says Hunter. “Our speed, our strategies and our solutions that come from our underwriting platform are bar none, the best in the industry. A farmer is never waiting on ARM to get it done.”

So why wait? To find out more about Ag Resource Management and locate an ARM representative near you, visit www.armlend.com.

 

1 “Busting Two Myths Can Make Corn Farmers $120 Per Acre,” Gil Gullickson, Successful Farming, (March 2, 2021)

All farmers are familiar with multi-peril crop insurance or MPCI – the basic crop insurance provided by the USDA’s Risk Management Agency. MPCI covers low crop yields from all types of natural causes including drought, excessive moisture, freeze and disease. Typically, MPCI provides up to 85% coverage. But for farmers coming off of a tough year, looking to expand or just wanting more protection, how do they bridge that extra 15% coverage gap?

That’s where a variety of additional insurance options, most from private companies, come into play and help provide additional coverage. Let’s explore some of those.

  • ARCH products are offered through Diversified Crop Insurance Services. These products allow farmers to purchase additional, un-subsidized bands of coverage up to 95% of trend Annual Production History (APH) and Optional Unit (OU), even if the underlying policy is Enterprise Unit (EU).
  • Revenue Accelerator Max Protection (RAMP), available through Farmers Mutual Hail, gives the insured the opportunity to boost revenues at specific risk levels within their risk management plans, up to 95%. RAMP supplements MPCI coverage and is designed to help provide additional coverage when production and/or revenue losses are just above or below the insureds’ MPCI guarantee.
  • Enhanced Coverage Option (ECO) is a crop insurance endorsement product that is new for 2021. It’s a government-subsidized supplemental product, available through any insurance agency authorized to provide MPCI. It provides additional county-based coverage for a portion of the underlying crop insurance policy deductible. ECO offers the insured farmer a choice of 90% or 95% trigger levels. Trigger means the percentage of expected county-based yield or revenue at which a loss becomes payable. Find out more about ECO here. To get estimates on what ECO premiums might be for your farming operation, use the Risk Management Association’s Agency Cost calculator, located online at  https://ewebapp.rma.usda.gov/apps/costestimator/Estimates/QuickEstimate.aspx

The differences between these various supplemental products vary widely, according to crop insurance experts. Consult with your Ag Resource Management agent to find out which products could offer the most economical, effective supplemental coverage for your farming operation.

“ECO is an area-based plan,” explains Mike Carey, ARM area manager, based in Morris, Illinois. “it’s based on results at the county level. It has some level of government subsidy, so it might be cheaper than ARCH products, but you won’t get the granular supplemental coverage you’ll get with ARCH. That’s why it’s important to sit down with us, go over your numbers, your APH and break-even numbers, to see what’s the right fit and formula for your farm.”

It’s important to work with partners who understand both the crop insurance side of the farm operation and the loan and finance side.

“Crop insurance and farm loans work hand in hand,” explains Donna Swanson, ARM area manager in Iowa Falls, Iowa. “The money we are able to lend out is directly correlated to the type and amount of crop insurance a farmer has, in combination with crop prices and other factors. At ARM, that’s our specialty – custom-crafting risk management plans folding in both crop insurance and ag lending to ensure our customers keep farming.”

All of the Ag Resource Management insurance experts are able to provide additional information and advice about these supplemental products and how they can benefit your risk management plan.

As the COVID-19 pandemic swept around the globe in 2020, it forced business and manufacturing shutdowns that disrupted industries far and wide – and agriculture was no exception.

Early in the pandemic, many farmers experienced the pandemic-induced disruptions firsthand. Manufacturing shutdowns in Mexico and elsewhere meant that farm machinery parts and components were in short supply. Because most manufacturers operate on a “just in time” manufacturing protocol, there was a lean global stockpile of parts and components.

However, Mexico and other countries soon put COVID-19 protocols in place and reopened manufacturing plants. The farm equipment segment, which took a direct hit in March and April, bounced back strongly. The Association of Equipment Manufacturers’ (AEM) December 2020 Ag Tractor and Combine Report shows that demand for tractors of all sizes is up 33.7 percent from the same time in 2019.

Why the surge in demand for equipment? Bluntly, the answer is money. Buoyed by stronger commodity prices and more than $32.8 billion1 in subsidies from the federal government, many farmers have money to spend, and for many, that means investing in equipment.

But financial experts warn farmers to beware: many of those hefty government payments will disappear in 2021 and could have a significant impact on farm income. While it’s good to invest in needed equipment, don’t overdo it.

“The subsidy payouts in 2020 have been an extraordinary income event for a lot of farmers,” explains Jay Landell, a Regional Manager with Ag Resource Management. “When we sit down to do our year-end analysis with our customers, we need to make sure and back out those subsidies from their forecast income for 2021, and then plan around that loss. It will affect the farmers’ break-even costs.”

The December AEM report on tractor and combine demand shows that demand for all sizes of tractors in the U.S. in December 2020 was 33.7 percent stronger than in December 2019.

Landell urges farmers to be both proactive and pragmatic in developing their financial plans for the new year.

“It’s time to meet with your financial partner to analyze what your true breakeven will be for 2021, what financial obligations you have and what your true income potential is for the coming year,” he says. “The subsidies provided a much-needed injection of cash into many farmers’ balance sheets, but farmers need to assume these payments will come to an end in 2021 without any further stopgap subsidies being put in place. It’s never been more important to work with an expert to structure an effective plan for success in 2021.”

 

 

 

 

2020 was one for the record books – and we’re not just talking about the pandemic. 2020 featured some of the wildest, most unpredictable weather events in recent history. One event in particular, a derecho storm that smashed through the Midwest on August 10, 2020, caused damage in Illinois, Ohio, Minnesota, Iowa and Indiana.

According to the National Oceanographic and Atmospheric Administration (NOAA), the derecho impacted more than 37.7 million acres of Midwestern farmland – making it the second most costly natural disaster of the year.

The rogue derecho storm that raged across the Midwest on August 10, 2020, caused more than $7.5 billion in damage – more than most hurricanes. The storm was the second-costliest U.S. disaster in 2020, impacting 37.7 million acres of farmland.

The costliest U.S. disaster of 2020? That title goes to Hurricane Laura, which caused $14 billion in damage when it ravaged the Gulf Coast last August, according to NOAA. In fact, Laura was one of twelve named storms (yes, that’s a record) and six record-tying hurricanes to hit the United States in 2020.

While these events caused farmers a variety of headaches, risk management experts advise that it’s time to move forward and plan for a successful 2021. So what’s the first step?

“It’s absolutely critical for growers to re-evaluate their risk management plan every single year,” says Matt St. Ledger, an Area Manager with Ag Resource Management based in Haubstadt, IN. “Every year, new insurance products become available, and those need to be evaluated. Some years, new or different adjustments are allowed on your Actual Production History (APH) calculation. A farmer’s crop mix can change year over year. There’s a lot to be evaluated each year to make sure the risk management plan is going to cover the farming operation adequately.”

Before beginning the process of calculating risk management, it’s important to select the right experts to partner with, according to Billy Moore, President of Insurance at Ag Resource Management. Find a risk management partner who will customize a risk management plan specifically to your farm operation’s needs.

“We have the ability to see farm by farm, acre by acre, what the best potential for that farming operation is,” says St. Ledger. “The technology allows us to dive into deep detail on any specific farm, looking at the best potential crop mixes and risk management plan to produce the best potential profit for that operation. We know every farm has its own unique potential, and that’s what we gear our lending and risk management planning toward.”

Moore and St. Ledger laid out a step-by-step plan they follow with clients when planning for the upcoming crop year:

· Step One: Get Your APH Adjustment Correct Now

· Step Two: Analyze the Good and Bad of 2020

· Step Three: Evaluate New Offerings

“I tell every grower I sit down with that it’s my job to find where those exposures or risk gaps are,” says Moore. “We want to take out the minimum amount of insurance needed to put them into a position where they can pay their bills and go farm for another year. That’s our business – to help you keep that farming operation going year after year.”

For more information, contact your nearest Ag Resource Management area manager or visit armlend.com.

Where did your farm’s equity go? Over the last four to five years, the agriculture economy has stagnated, and commodity prices have dropped. We’ll explain why this has caused many farmers to lose equity and left them struggling to secure capital needed to keep farming.

Liquidity is working capital. Liquid funds include savings and other assets you can turn into cash quickly to help cover costs when an expense arises — either planned or unplanned. Your balance sheet also lists intermediate-term assets, such as equity built up in equipment, and longer-term assets represented by land or real estate equity.

Strong commodity prices allow farmers to buy or trade equipment on a regular basis to collect the tax deduction created by accelerated depreciation. As the ag economy slows, some farmers have to slow or stop that purchasing cycle, leaving them to manage high equipment payments without the benefit of the accelerated tax deduction. Furthermore, low commodity prices reduce the cash flow they count on to keep up with payments.

A weak economy also slows equipment sales, creating a drag on equipment value. This catches famers in a double-jeopardy situation as depreciation piles up. Thus, the equity in farm equipment begins to shrink — even while farmer stays current on the payments. This grim combination of circumstances makes it difficult for equipment to hold its value and negatively affects the farmer’s position in securing future deals.

From the standpoint of land, equity erosion can even affect farmers who built equity through many years of consistent payments or through inheritance. Losses in recent years have depleted many farmers’ short-term liquid assets. Banks watching those losses pile up may ask producers to rebalance their assets. Farmers can inject cash (liquidity) back into the operation by selling some land (which either reduces potential harvest volume or increases overhead through rental fees) or by refinancing their land to convert some equity into cash, which stretches their payments farther into the future.

Low commodity prices can even limit the ability of farmers possessing plenty of land equity to benefit from a refinance deal. When sitting down with a banker to work out cash flow, what remains to produce the coming year’s crop after overhead, land and equipment payments may not add up. There simply may not be room to increase land payments by $10,000 or $20,000 in a weak ag market.