3 Financial Trends To Watch In Agriculture

I recently had the opportunity to attend a meeting of credit managers for Midwest ag supply and input companies, in part to get a sense for the major financial issues facing the distribution channel in the year ahead. Five lenders were invited and made individual presentations.

I gleaned three key observations from the presentations. None of them are new, but we haven’t needed to discuss them for some time. They include the following:

  • In general, agriculture balance sheets remain in good shape, but liquidity is being stressed.
  • Both fixed and variable costs still need to come down.
  • Assessing the management and stress of your customer is key.

Let’s take a look at these on an individual basis, and consider what you should be looking out for as you go through the planning months this year.

1. Balance Sheets

Balance sheets remain sound with good levels of equity and liquidity, but as expected, debt, and financial risk have been consolidating at disproportionate levels in larger operations. Operations with both high levels of rented acres and rental rates have been hit harder in this downturn than most. Liquidity (working capital/value of farm production) is declining across nearly all segments, but is declining at a quicker pace in larger, higher-risk operations.

Many lenders require a liquidity ratio of 20% to 30%, which provides a cushion for adversity to both the lender and the producer. It is not uncommon today to see that ratio under 10% or negative. As liquidity shrinks, buying patterns will change based on income tax situations, discounts, cash available, and delayed crop mix decisions based on anticipated price.

As liquidity shrinks and traditional lenders seek to manage exposure, other nontraditional lenders are entering the picture. Landlords may be asked to change the timing of rents from spring to fall. Input suppliers may be asked to carry inputs for longer periods. In some cases, there will be limited risk to these new lenders. However, many times the challenge for these types of lenders is communication and expertise.

Many nontraditional lenders do not clearly understand the financial information, and may fail to check with existing lenders, complete lien searches on collateral, or file the proper lien documents. These lenders may view their actions as a benefit to the producer when in fact it may delay tough decisions in cases where time might not be the ally of the producer.

2. Fixed and Variable Costs

Fixed costs associated with labor and equipment rose to excessive levels in some cases during the last five to seven years. Correcting excess equipment and labor issues can create tough decisions for producers when equipment values are soft and part of the labor may be family.

There are many ideas on what these two segments should be, but producers generally should confine these to less than 20% of the expected gross revenues on a typical corn-soybean rotation. The need to reduce both labor and equipment may cause some producers to rethink their use of custom application or application methods.

Land costs are moving down, but may still be higher than what is sustainable long term. Many producers have significant equity in owned land. However, the equity may not be truly available for “rebalancing” the balance sheet. Historically, farm land nearly always trades at levels above cash flow, but recently the market value and cash flow gap widened significantly. Today lenders often cap loan levels to more closely reflect cash flow ability of the land causing some equity to be accessible through liquidation only.

Like land costs, variable costs are falling, but not at a pace quick enough to keep up with falling grain values. Input suppliers should expect continued pressure on price and volumes negotiated by producers, in addition to delayed decisions on what to purchase. Some early estimates of inputs still reflect the need to fall roughly 10% in relation to projected gross revenues.

3. Management and Stress

Cycles tend to highlight who the risk managers are that understand their financial situation. Recognizing and managing the risk between total costs and total revenues will remain at a premium for those operations carrying significant financial leverage. This cycle is nothing new to agriculture and like any other cycle, some producers will thrive in the opportunity. Others will struggle to make decisions quickly enough or significant enough to survive. Stress will become evident as some producers withdraw from normal communications and change social habits.

A number of these changes will be planned and needed, and others will simply be stress related. Those producers who decide this is just another cycle will make critical adjustments on their own, while remaining engaged and open with information on what they are doing and why.

As you choose new opportunities, make sure you are considering the benefits and risks for both parties.

Leave a Reply

Management Stories

Roy Blunt
LegislationARA Recognizes Blunt, Heitkamp For Legislative Efforts Supporting Agriculture
February 17, 2017
Agricultural industry continues to face federal regulatory challenges. Thankfully, agriculture’s allies in the U.S. Senate stepped forward. The Agricultural Retailers Read More
LegislationThe Fertilizer Institute Commends Senate On Confirmation Of New EPA Administrator
February 17, 2017
The Fertilizer Institute (TFI) President Chris Jahn issued the following statement on the Senate confirmation of Oklahoma Attorney General Scott Read More
Trump, Senate, Cabinet
LegislationBREAKING: Trump EPA Nominee Scott Pruitt Confirmed by Senate
February 17, 2017
Scott Pruitt, who as Oklahoma’s attorney general spent years suing the Environmental Protection Agency over its efforts to regulate various Read More
ManagementFebruary Road Trip Edition
February 17, 2017
Editors Paul Schrimpf and Eric Sfiligoj discuss their recent visits to Indiana and Kentucky. Read More
Trending Articles
Farmer and aptop
Matt Hopkins10 Warning Signs Your Website Is Grossly Outdated
February 8, 2017
Your Website is often a visitor’s first impression of your ag retail business. A positive first impression can set the Read More
AgriSync
Matt Hopkins17 Agriculture Apps That Will Help You Farm Smarter In 2017
December 9, 2016
Ag professionals are working smarter, not harder, than ever before. Smart farming technologies have enabled them to reduce costs, maximize Read More
R4023 Sprayer, John Deere
CropLife 100Ag Retail Equipment Report: The Green Party Continues
December 7, 2016
In the annual race for sales in the ag retail equipment marketplace, the color schemes for participants are a little Read More
Mike Stern
Precision AgClimate Corp. CEO Talks Retailer Support For Digital Ag
December 1, 2016
CropLife Magazine’s sister publication, AgriBusiness Global, recently sat down with Mike Stern, CEO of The Climate Corp., following the Monsanto subsidiary’s Read More
Precision AgTrimble Debuts End-to-End FMIS Platform
November 28, 2016
October’s inaugural PrecisionAg Vision Conference left this author with many thoughts and things to ponder in the coming months. Probably Read More
CHS Primeland
CropLife 100The 2016 CropLife 100 Report: Reviewing The Many Bulls And Bears Impacting This Year’s Marketplace
November 28, 2016
For virtually all of 2016, the nation was wholly focused on the big Presidential election. Some folks aligned themselves with Read More
Latest News
Roy Blunt
LegislationARA Recognizes Blunt, Heitkamp For Legislative Efforts …
February 17, 2017
Agricultural industry continues to face federal regulatory challenges. Thankfully, agriculture’s allies in the U.S. Senate stepped forward. The Agricultural Retailers Read More
LegislationThe Fertilizer Institute Commends Senate On Confirmatio…
February 17, 2017
The Fertilizer Institute (TFI) President Chris Jahn issued the following statement on the Senate confirmation of Oklahoma Attorney General Scott Read More
Trump, Senate, Cabinet
LegislationBREAKING: Trump EPA Nominee Scott Pruitt Confirmed by S…
February 17, 2017
Scott Pruitt, who as Oklahoma’s attorney general spent years suing the Environmental Protection Agency over its efforts to regulate various Read More
ManagementFebruary Road Trip Edition
February 17, 2017
Editors Paul Schrimpf and Eric Sfiligoj discuss their recent visits to Indiana and Kentucky. Read More
Heritage Cooperative Finished Building Aerial
ManagementHeritage Cooperative, Agland Co-op Approve Merger
February 17, 2017
Agland Co-op and Heritage Cooperative stockholders have both approved the merger agreement between Agland Co-op and Heritage Cooperative. Now begins Read More
LegislationARA Fly-In: Ag Retail Descends on Capitol Hill, Lawmake…
February 15, 2017
More than 100 agricultural retailers, distributors and suppliers headed to Capitol Hill Tuesday morning for the Agribusiness Congressional Fly-in, according to a Read More
Untreated soybean seed Heartland Coop
Seed/BiotechMarrone Bio Innovations, Groundwork BioAg Bio-stacked M…
February 13, 2017
Marrone Bio Innovations, Inc. and Groundwork BioAg, Ltd have announced successful seed treatment field trials of the world’s first all-biological Read More
NL5000 With G5 Technology
SpreadersNew Leader Introduces NL5000 Dry Nutrient Applicator Wi…
February 13, 2017
New Leader, a division of Highway Equipment Company (HECO), has announced the next generation of spreading technology with the NL5000 Read More
Fertilizer Storage
Crop InputsThe State Of The Fertilizer Industry
February 9, 2017
He’s all hat, no horse.” It’s a humorous way of describing a person who tells a good story, but is Read More
CropLife 100Pinnacle Agriculture Agrees To Credit Agreement Amendme…
February 9, 2017
Pinnacle Operating Corp. has entered into an amendment (the “Amendment”) to its First Lien Credit Agreement that will provide for, Read More
ManagementUpdates on Upcoming Trips, Dow-DuPont, and the Des Moin…
February 9, 2017
Editors Paul Schrimpf and Eric Sfiligoj review a few future travels, along with the latest on big company mergers and Read More
Championship Tractor Pull
EquipmentNational Farm Machinery Show Highlighted By Championshi…
February 9, 2017
The scream of monster engines, the stench of burning rubber and the ground-pounding vibrations of the country’s largest, loudest and Read More
Farmer and aptop
Matt Hopkins10 Warning Signs Your Website Is Grossly Outdated
February 8, 2017
Your Website is often a visitor’s first impression of your ag retail business. A positive first impression can set the Read More
Corn Field
InsecticidesArysta LifeScience, DuPont Collaborate On Rynaxpyr Prem…
February 8, 2017
Arysta LifeScience recently announced that it has entered into a global collaboration with DuPont Crop Protection for the development of Read More
Industry NewsThe Fertilizer Institute Board Elects New Chairman, Vic…
February 8, 2017
The Fertilizer Institute’s (TFI) Board of Directors has elected Chuck Magro, President and CEO of Agrium, and Tony Will, President Read More
Sonny Perdue
ManagementARA Joins More Than 600 Organizations In Support Of Per…
February 8, 2017
The Agricultural Retailers Association (ARA) recently joined with more than 600 agricultural groups on a letter of support for Governor Read More
World Agri-Tech Innovation Summit Panel 2016
Crop InputsWorld Agri-Tech Innovation Summit To Be Held In San Fra…
February 8, 2017
“Breakthrough Applications and Business Models for Sustainable Farming” is the theme of the World Agri-Tech Innovation Summit to be held Read More
Cedar Country Cooperative
Eric SfiligojConsolidation In Agriculture: More Middle Movement
February 7, 2017
If you’ve regularly followed my column, you know I’m something of a movie junkie. Like many, one of my favorite Read More