Should Farmers Use Land as Collateral?

December 27, 2017 08:00 AM

It’s a story of tight margins on farms in 2017, and those margins are growing tighter for some farmers. That’s forcing farmers to turn to lenders in search of additional farm loans.  

Three ag bankers representing various geographies say using land as collateral can be a viable option, but it’s not for everyone.

“Each person's situation is different,” said Chris Floyd, president and CEO of First National Bank in Syracuse, Kan. “The biggest thing is having the appropriate level of debt on that land and not having too much on there. The worst place to be in is where you have to be a forced seller.”

He says having too much debt on that land is something producers should try to avoid while keeping payments at a manageable level. That means land payments shouldn’t be more than what a cash rent acre brings in the area.

“Make sure your payments are appropriate for your comparable rent level or where rents should be and don't get over leveraged on your real estate either,” said Floyd.

Keith Knudsen, president and CEO of Security Bank in Laurel, Neb., says using land as a collateral is a good idea in today’s environment.

“We encourage if we're doing that, it seems like in our market about a 50 percent loan to value on farmland right now is about what will cash flow,” said Knudsen. “That being said, the primary reason is to spread those payments out if we do have several years of problems.”

He says producers don’t want to get in a situation where they’ve used land to help secure a loan, and then land values see a sudden decline, while interest rates shoot higher.

“We don't want to get into that perfect storm where land values drop and all of a sudden we don't have that equity to rely on,” said Knudsen.

Alan Hoskins is president and CEO of American Farm Mortgage located in Louisville, Ky. He says using land as collateral can help with interest rates.

“Using land as collateral is typically the lowest interest rate that a borrower will obtain because it's the most secure form of collateral,” said Hoskins. “I think another thing as a lender we want to make sure that we're not taking more than an adequate amount of security.

“If there are challenges a year from now, we want to have some land that if necessary we could refinance some carry-over debt against, assuming the cash flow works,” said Hoskins.

Hoskins suggests farmers explore all options, but says land is a secure option for many farmers today.  

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Spell Check

Sioux Falls, SD
12/31/2017 01:30 AM

  Improper debt structure will take you out of farming, not mortgaging land. Your balance sheet should be split by current, intermediate and long-term assets; with debt split into similar ratios. If you owe money, your land is at risk, so why not capture historically low fixed interest rates. The final piece of proper structure is the need to have a positive working capital. Carryover operating loans have been allowed due to strong balance sheets, but now bank examiners won't allow a farm with multiyear losses to carry over operating loans. The erosion of working capital has to do with many causes, low margins, excessive cap ex, high living expenses. Today's medical costs are the same as it took for a family to live 15 years ago. GAAP financial statements should be prepared. If you have no equity on a GAAP basis, i.e., your FMV balance sheet equity is appreciated land, you have to rethink your business plan. The most important management report you can create is the Statement of Cash Flows. It shows how well you manage the funds available to you. Being able to have GAAP financials for a lender is better than having them create something based on a haphazard method of record keeping. This is not the 1980's. There are operators with substantial assets, low or no debt and the ability to cash flow very well. We have crop insurance which limits risk, compared to nothing prior to the 1986 farm bill. Interest is not our problem, the lack of operating income is, and that to will change. I fear there are still too many operations that are farm laborers rather than farm managers. The management piece cannot take a back seat.

bad axe, MI
12/28/2017 06:12 AM

  When I was growing up I had a old farmer across the road and he always said you can't mortgage land to pay for machinery and imputs, you will never pay it off and it will in time put you out of business . He was right it took a lot of guys out of farming in the area. Mortgaging your land is a good way for the lender to sure up his books I will agree with that, but if you have to mortgage land in this farming environment with higher interest rates coming, strong dollar, and over production your going to lose the farm in 5 to 7 years. The farmer doesn't understand the banker isn't your friend , he is in business to make money for his boss that's why he is acting like your buddy. He is just trying to make a living like you , but in a lot easier way. If you have to mortgage land to keep going it's farm doom.

Kearney, NE
12/28/2017 07:32 AM

  C.K. is spot on. Using your land as collateral to buy/extend the terms of other loans on over priced machinery, inputs, rents, ect is a bad idea. Having to do so is a huge red flag about the economic viability of your operation. Land, machinery, rent, and input prices are eventually going to drop unless there is an extended(many years) rebound in commodity prices, as every producer is burning through their working capital. If, in addition to this, you used your land as collateral, you will be bankrupt. This has happened before, and will happen again. Ultra low interest rates are simply masking the sickness in Ag.


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