Cash rent standoff: Farm lenders' action

Cash rent standoff: Farm lenders' action

If cash rents don't come down and farmers burn capital, how soon will lenders step in? (part four of four)

This is part four of a four-part series on cash rent. Find links to all installments as they appear at the end of this story.

In the first three parts of this series we outlined how some farmers who pay high cash rent must reduce those land costs or give up the property. However, they may choose to continue renting even if it means losing money – which comes out of their bank account.

Related: Lower cash rents – but will it be enough?

If cash rents don't come down and farmers choose to burn capital, a few scenarios could play out. First, you may see more financial difficulty move into farm operations.

"Going from $7 corn to $3.50 corn creates a lot of issues," says Nebraska farmer Keri Votruba. "Something has to give, and I do believe it's going to be land." Photo by Jaci Haas

Second, we could see more lender control. They could put in broad parameters on how much operating credit is offered based on cash rent levels.

"Lenders might say, we don't lend money at certain rent levels,'" says Kent Meister, who works with farmers cooperating in the Farm Business Farm Management association in Central Illinois. "Ultimately, if equity slips, those lenders will begin to react more to cash rents."

Some tenants will decide to bite the bullet in hopes that they keep the farm until good times return. But how much they are willing to lose per acre is anyone's guess.

"If you wake up a few years from now and you've depleted your working capital, what good is that?" asks Steve Myers, a farm manager for Busey Bank in central Illinois.

Adds Meister: "Until we burn through working capital, that farmer is going to make the decision whether to pay high rent. After that, the lender is going to decide. Some farmers can afford to lose $100 an acre for at least another year. If that working capital starts getting absorbed by losses, then the lender may step in because they don't want to be put at risk."

Related: Prepare for cash rent discussions

For Nebraska farmer Keri Votruba, the decision to turn down land still comes back to risk management. He started farming in the 1980s as a 20-year-old. Like many his age – 56 – the experience is seared in his memory.

"I saw a lot of farmers who would have been the age I am now who had to sell their farms," he says. "I don't want that to happen to me."

He recalls an old adage from a gentleman he respects: "You can lose a crop your first year and survive; you can lose a crop the second year and probably survive because of a relationship with a lender; the third year you lose your crop, you're just broke."

Expand your farm business skills at the Farm Futures Ag Finance Boot Camp, Jan. 20, 2016, and the Farm Futures Farm Business Summit, Jan. 21-22, 2016, in St. Louis.

See all entries in this series:
Cash rent standoff part one: Prohibitive land costs
Cash rent standoff part two: Negotiating leases
Cash rent standoff part three: How will land values adjust?
Cash rent standoff part four: Farm lenders' action (current entry)

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