Commodity prices have been low enough for long enough that today’s agricultural landscape has drawn more than a few comparisons to the debt crisis of the early 1980s. That has been met with an equal number of reassurances — “Don’t worry; it’s not like the ’80s.”
But if not — why not?
For starters, the early 1980s was severe — so severe it was considered agriculture’s “own private Great Depression,” says Paul Stoddard, instructor and lecturer with the University of Illinois Department of Ag and Consumer Economics. Even so, what’s happening in farm country is worrisome, he says.
“In the 1980s, we had a real solvency problem,” he says. “Now, we have a cash flow issue instead. That’s still concerning. With a cash flow challenge, it’s a slower process. As you get into losing money four or five years in a row, it becomes incrementally more difficult to work with banks, and you increasingly don’t have a lot of working capital.”
Compute working capital by subtracting current liabilities from current assets, whether that’s financial assets, inputs already bought, and crop or livestock inventories. Consider how the average current ratio for the farm sector has declined since 2012. Five years ago the ratio was 2.87 — well above a commonly used benchmark of 2. In 2017, that value has dipped to 1.55 — a huge red flag, say many economists.
“It gets harder to pay bills,” Stoddard says. “You may still be solvent, but your assets aren’t liquid to pay bills, so you end up having to sell something to do that.”
And that’s the crux of the problem. What can farmers do to stay ahead of potential problems so they don’t have to sell prized assets?
As the Rolling Stones crooned back in 1964, “Time is on my side.” But for farmers in the fourth year (and counting) of lower commodity prices, quite the opposite is true, according to Nate Franzen.
“Time is not your friend,” says Franzen, president of First Dakota National Bank’s agribusiness division. “You’re far better served being proactive if you find yourself in a bind and need to readjust.”
For example, farmland values have slipped since 2013 but haven’t fallen dramatically over the past four years. But as commodity prices stay low, it’s reasonable to expect farmland values to continue to decline. For farmers looking to fix a cash flow situation through a land sale, waiting may not be their best option.
“If you waited another two or three years, you might have to sell twice as much land to cash-flow,” he says. “In an environment like this, the sooner you adjust, the better off you will be.”
Selling land is never the first move in a farmer’s playbook. Fortunately, you have several options before getting to that point, according to Curt Covington, senior vice president of Ag Finance at Farmer Mac.
The first point of order is making sure leverage against the operation is as low as possible on the balance sheet, he says.
“Leverage kills,” he says.
“If you are overleveraged today and short of working capital, you are going to find yourself with no other option than to sell land,” Covington explains.
Focus on expenses and look for and sell so-called “wasted assets,” Covington recommends. If a piece of machinery has been collecting dust in the shed for two or more years, for example, it’s probably time to come up with a plan — share it, rent it or sell it.
It’s also worth planning with the assumption that lower commodity prices will last at least through 2019, Covington says.
“Think strategically ahead,” he says. “If there’s a continued margin compression into 2018 or 2019, think now about what nonessential expenses can be cut or possibly eliminated until better times return. Put off all unnecessary capital expenditures that can’t be held together with duct tape and baling wire.”
Falling land prices sometimes makes the idea of expansion feel lucrative. But remain prudent and shelve the idea if it doesn’t absolutely pencil out, Covington says.
The same advice goes for refinancing — do it if it makes sense, but proceed with caution.
Reducing costs is one way to improve margins. So is adding revenue. It may be time to look into new revenue sources. “The folks who struggle the most are the folks that don’t want to make changes,” Franzen says.
New revenue can come on the farm or off, he says. For some, that may mean farm diversification. For others, it may mean adding custom work. Some may be able to leverage an asset, such as an old finishing barn or feedlot. Some may seek off-farm employment to supplement income. Some younger farmers may capitalize on their tech knowledge and become consultants.
“There are a lot of opportunities out there,” Franzen says.
Think of margins as “the sum of a lot of small things,” Stoddard concludes. Because even though this isn’t the 1980s, too many years without positive cash flow could still end with the same kind of heartbreak.