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.
ARM’s Equity Solution
Ag Resource Management (ARM) offers a solution to farmers with limited equity. ARM doesn’t look at equity like a traditional bank does, because ARM uses this season’s growing crop, crop insurance and government payments as collateral.
If a bank determines they can’t renew a farmer’s loan, the farmer can work with ARM to finance the entire loan or just a portion. Usually the bank will handle traditional term lending, and ARM will create a plan for the farm’s operating loan. ARM can step in when there isn’t enough equity for a traditional banker to approve a loan and provide the needed liquidity for a farmer, based on the projected crop. This patnership allows the farmer to continue farming.
ARM also consults with the farmer to help identify where issues may exist on the farm. The process of sitting down together and outlining a budget helps determine exactly where the money is going and where the farm can tighten its budget to get the most ROI out of the loan. For example, family living expenses may still be on the high end compared to where commodity prices currently sit. When expenses are detailed, it’s often easy to find areas to trim back.
Rent is another example of a line item that can often be reduced. It’s not an easy discussion, but once an analysis is complete on a field-by-field basis and the expenses are broken down, it’s fairly easy to see where rent is too high to create a profitable scenario. A farm’s highest producing fields aren’t necessarily the most profitable. Often, the highest producing fields are also the ones with the highest rent. When farming a particular field is not profitable, a farmer must decide to either renegotiate the rent or give up the land. Giving up hard-won land contracts can be very difficult for a farmer, but sometimes it’s the best choice for the long term.
ARM also creates a cashflow analysis, which includes the crop budget. Looking at input costs and actual production history (APH), ARM works with the farmer to determine where to spend the loan dollars for the best possible return — sometimes optimizing profit means accepting a smaller yield and benefitting from reduced seed and input costs.
Lastly, ARM takes a holistic approach, looking beyond just that season’s crop to help address issues that affect the entire operation. This perspective helps farmers focus their resources throughout the year, allowing them to operate much more efficiently and reach their long-term goals.
Partnering with Farmers
ARM wants to partner with the farmer, the bank, distributors and other input suppliers because the best approach gets everyone working together in the best interest of the farmer. Along with the loan, ARM offers farmers budget and risk-management advice. Having a deep understanding of crop insurance, they can guide a farmer through those discussions and decisions, as well.
The farmer receives a monthly loan statement, and at the end of the loan, ARM collects harvest information and conducts a reconciliation, showing the end results of the season. This can sometimes lead to finding a revenue insurance claim because of a shortfall. Or it might result in finding another area of budget leakage that can be corrected for the next year. Reconciliation helps the farmer develop a strong understanding of and confidence about where the dollars were spent and how that affected total production and return on investment.
ARM provides the support you need to get the most out of your farm. Struggling operations as well as those simply looking to tighten up their business practices can benefit from the ARM crop-as-collateral lending model and the guidance its experienced staff can provide. ARM does ag finance differently. Is it time your farm did, too?
Contact Ag Resource Management to learn more about finance options for your farm.