Loans are widely available, but lenders want more details
As producers apply for operating loans to grow the 2016 crop, lenders say credit availability for most farmers is comparable to that of a year ago. What has changed is the increased scrutiny lenders are giving applicants and their financial health.
“We’ve just seen too many situations where we’ve got great producers, but they’ve sat on a crop and cost themselves,” says Richard Johnson, an ag lender with Adams Bank and Trust in Ogallala, Neb.
To ensure producers can make payments, lenders are verifying farmers’ real estate taxes have been paid, pulling credit reports to check the status of outstanding consumer debt and requiring them to explain how they plan to sell the old crop. It’s a trend he and other experts think could extend into 2017 and even 2018, assuming low commodity prices persist. “They and we need to be as efficient as possible with resources,” Johnson says.
Cash-Flow Challenge. The good news for a majority of producers is that credit availability hasn’t materially changed despite the downturn in commodity prices and land values, ag finance experts say. That’s true even though overall margins have declined 30% to 35% from their peak for most farmers, says Mark Jensen, senior vice president and chief risk officer at Farm Credit Services of America (FCSAmerica) based in Omaha, Neb. The bad news is that for producers with unsustainable cash flow and working capital, more details will be needed up front.
“Producers are facing a real cash-flow challenge, for sure,” says Jensen, estimating up to 25% or so of FCSAmerica borrowers are showing more significant cash-flow issues relative to historical norms. “It’s critical producers understand their cost of product and how well their balance sheet is structured.”
Debt-coverage ratios are a big issue for Joel Oney, vice president and manager of agribusiness at Columbus, Ohio-based Heartland Bank. His bank uses a standard rate of 1.2%, meaning farmers should have $1.20 of net cash flow after expenses and family living for every $1 of principal and interest payments on debts.
“You can have some weaknesses in solvency in collateral and offset that with guarantees and strong earnings, but there’s no replacement for repayment capacity,” Oney says.
Should I Buy It or Hold Out?
Equipment purchases and other major expenses should be based on need.
Machinery purchases and upgrades are among the financial decisions farmers are holding off on early this year, notes Richard Johnson, an ag lender at Adams Bank and Trust in Ogallala, Neb. That’s in contrast to the era of $7 corn, when many producers bought large new equipment with fewer reservations.
Now more than ever, farmers want to know whether a tractor purchase today could mean financial regret down the road.
“A lot of it is based on need,” explains Johnson, noting machinery must be functional and reliable enough to help plant this year’s crop. “I had a situation this year where [the farmer] didn’t want to upgrade the tractor, I didn’t want them to, but both of us felt they had to … We try to look at what it’s going to do to the overall operation. If they can’t do it, I’ll tell them so.”
Previously, Johnson has seen farmers get financing through a third party even after he’s advised them against a purchase. He hasn’t seen that this year, but he’s not ruling it out in the months ahead.