Optimize Your Farm Debt

October 28, 2015 02:03 AM

Consider financing options to improve balance sheets

Today’s financial times put even seasoned producers to the test. They illustrate the importance of planning for both ends of an ag cycle. 

“When prices were higher, we used that time to build our working capital,” says Kathy Reinhardt, who grows corn and soybeans in western Illinois with her husband, Ken. “While we used some of our funds toward planned equipment purchases, we realized the importance of reserving cash funds for the future.”  

Reinhardt, a licensed CPA who worked in public accounting for 20 years, understands the importance of evaluating financing options and factoring in future interest rates. 

As a result, Reinhardt carefully considers whether those rates are applied using a simple or compounded formula as well as payment terms and loan covenants when making a purchase, regardless of the size of the item.

“I know what we expect to pay in interest on the life of our loans, how much cash will be required by year, along with if and when the rate would adjust,” she says. 

It’s time to tighten the financial belt, says Jason Gandy, vice president of lending with Capital Farm Credit in Lubbock, Texas. 

“If you’re going to spend money, make sure it’s in a way it will make money,” Gandy says.

Set Borrowing Boundaries. A good place to start is with your machinery fleet. For owned equipment, consider refinancing options. 

“Machinery debt is a great option to reimburse working capital by putting a new loan in place, especially if you’ve used cash in recent years to do capital expenditures,” says Adam Stonecipher, vice president and ag banking officer at First Midwest Bank in Danville, Ill. 

Be sure to only refinance loans on assets you intend to keep for the life of the loan.  

Many vendors are now offering financing for inputs. “The biggest factor to look at is when money is due,” Stonecipher says. “In some cases, you book inputs in the spring and don’t have to pay until after harvest. If your marketing plan calls for storing crop until next spring, make sure you have an operating note in place to pay that bill or you may incur major fees.”

Difficult Decisions. By continually assessing finances and goals, the Reinhardts can make good decisions. For example, this year, they stopped farming 500 acres of cash rent ground. It would have created a loss.

They continue to look for ways to trim expenses. “We have to ask ourselves the hard questions,” Reinhardt says. “We have to be prepared to evaluate expenditures and processes, even ones that may seem normal and customary.”  

Farm Debt Is On A Steady Incline
After several years of improvement, farm financial risk indicators are expected to rise this year.


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Spell Check

Western, NE
10/28/2015 09:59 AM

  I don't know if I'd advocate getting a new loan to bolster working capital. I would consider refinancing the loans I have at fixed rates and extend the term if possible to reduce the demand on cash provided the assets are acceptable to the lender. It's going to be tough the next few years. One has to expect serious market disruptions when interest rates finally do creep up as commodity traders exit positions and end users force increased interest costs back to the producer in the form of longer storage periods. Congress, in their zeal to reach a budget compromise, just cut $3 billion out of crop insurance impeding another tool for financial survival.


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