April 10, 2017

"Liquidity Crisis" Looming for Some Farmers

 |  By: Maureen Hanson

While the dairy industry just weathered a brutal storm, all of production agriculture could be facing headwinds in the next few years, according to economists from the Purdue University Center for Commercial Agriculture.

Purdue economists Jason Henderson, James Mintert and David Widmar recently served on a panel and shared their thoughts to a standing-room-only crowd at the Commodity Classic in San Antonio, Texas. While their audience was primarily row-crop farmers, their comments and advice resonate with producers in almost all agricultural sectors.

None of the economists predicted a farming free-fall comparable to the 1930s or 1980s, but they acknowledged there could be tough sledding ahead for some farmers, especially those who are under-capitalized. In short, today’s outlook appears to be less of a full-blown “farm crisis,” and more of a “liquidity crisis.”

Their advice for successfully navigating the next few years included:

Work openly with your lender – Invest in the time to map out scenarios to show your lender how you will be ready to respond to various market conditions. “These don’t have to be elaborate, just sound and well-thought-out,” said Henderson. “They also don’t all have to be negative. Be able to show how you will respond to upside conditions as well.”

Know your cost of production and return on assets – “These are fundamental requirements today,” said Henderson. He also advised benchmarking your production costs against others in your business – not just locally, but globally as well.

Be aware of regulators – In many cases, your banker is asking more questions of you, because regulators are asking more questions of him or her. “Many regulators do not have agricultural backgrounds,” said Henderson, “and they just came off of a housing crisis that has left them skittish about risk.” It may be necessary for you to restructure debt to stretch out payments and avoid regulators becoming involved in your account. “You definitely don’t want to get to that point,” he advised.

Sort through the noise of innovation – Think about the needs of your business when it comes investing in to new technology. “Not every new technology is appropriate for every farm,” said Mintert.  “Early adopters have historically benefitted the most from adopting the right technology for their operations.”

Explore risk-management tools – “Opportunities to manage risk in farming are much more varied than a decade ago,” said Widmar. “Engage the service of intermediaries to help you with crop insurance decisions and commodity marketing.”

Embrace change – Changing enterprises within farming may be the most prudent way to stay farming, suggested Henderson. Changing methods is another. For example, organic production is currently attractive because of the larger margins it affords. Other value-added ventures such as on-farm processing also might improve profitability. He added: “A lot of land may be turning over in 1 to 3 years. Try to get yourself in the best position to take advantage of that.”  

Look for merger opportunities – Agribusiness companies continue to merge because of pressure on margins, noted Mintert. Production agriculture faces similar, if not growing, margin pressure. As a result, a new trend in farming is to acquire whole operations, a.k.a. “enterprise consolidation.” “Look around for people who may be exiting the same business you are in. Think about their needs, and how you can help them in a mutually beneficial business arrangement,” he advised.

While the U.S. economy and trade face a lot of uncertainty right now, Widmar predicted that interest rates will rise in the next 3 years. “Farm loans that currently are at 4% probably will be in the neighborhood of 7% by 2020,” he suggested. “Low interest rates helped fuel the most recent agricultural boom, and higher rates will be a part of a changing picture in the immediate years ahead.”