The Top Line

October 9, 2009 03:15 PM

Bricks Are Needed

The big bad wolf has been sighted in agriculture's neighborhood. If your financial house is made of bricks, no need to worry. If you have sticks and straw, it's time to consider what you need to do to reinforce the structure.

For the past year, experts have issued cautions about counterparty risk. Higher input prices led the way, but now some of your buyers are showing concern. If they have forward contracts with you, don't be surprised if they ask for your financial statements. They just want to be sure you'll be around in a few years to deliver. 

Farmers with ample working capital probably don't need to worry, say experts like Roger Schlitter of Roger's Farm Financial in Mason City, Iowa. They'll likely weather the potential storms just fine. They may even prosper.

Schlitter urges producers to take a close look at their finances. Even with lower inputs forecast for 2010, the cost of production for corn and soybeans looks to be above the average sales prices. Conditions are likely to tighten.

This is sure to push some farmers out of business and it will force others to contract, either through giving up rented land or selling assets to free up credit and create operating cash.

If you're financially well-positioned and have a sound risk management plan in place, the bankers will look your way.

If the big bad wolf comes knocking, you can rest easier in your house of bricks. You may even think about adding on.

Livestock Is Shaky. Over the past few months, I've taken countless calls from livestock producers on the brink of financial collapse. The hog industry is in worse shape than it was in 1998–99: 22 of the past 24 months have produced negative returns. The dairy industry is worse. Unfortunately, these producers are seeing what happens when the market forces them to burn through working capital during economic downcycles.

With the outlook for at least another eight to 10 months of pork operating margins in the red, bankers are circling the wagons. Hog loans are considered high risk and interest rates are on the way up.

Banks are pressuring some producers to liquidate their herds and get out while there is still something to salvage. Such lenders are not exclusive in livestock, and if the future plays out as many experts predict, more foreclosures on these operations are ahead. —Greg Vincent

Top Producer, Ocotber 2009

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