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.