Prepare for higher costs, lower profit | Increase working capital, restructure debt or consider operating line of credit
CHICAGO, Ill. — One of the largest farm lenders in the United States says it’s time for farmers to consider locking in interest rates and building working capital.
Bill Johnson, president of Farm Credit Mid-America, said agriculture is heading into a period of higher interest rates and lower commodity prices.
There appears to be a growing appetite in Washington to end the U.S. quantitative easing program, which pumps $85 billion a month into the U.S. economy.
The winding down of that program will lead to a hike in long-term interest rates.
“We do believe as interest rates rise that we will see some challenges that will cause some money to come out of agriculture,” Johnson told the 2013 DTN Ag Summit.
Speculative money will leave commodities as interest rates rise and head back into things like bonds, which combined with recent supply side pressures could trim peak grain prices by up to 40 percent.
Johnson said farmers need to prepare themselves for a period of higher debt costs and lower grain revenues. One way they can do that is by borrowing at today’s attractive terms.
“If you haven’t locked in your interest rates, somewhere in the next few months might be a time you might want to consider that,” he said.
Farm Credit Mid-America is a co-op that has loaned $20 billion to 97,000 farmer members in Indiana, Ohio, Kentucky and Tennessee.
Johnson advised growers to fix today’s rates for the entire life of the loan rather than just the next five years.
“If you can get that protection and take that risk off the table, it would make sense to us to do that,” he said.
Johnson also said growers should ensure they have adequate working capital, or cash and marketable inventories, to service their current liabilities such as operating lines of credit and principal and interest on term debt.
Farms have been making good money the last few years, but that doesn’t mean they have a lot of available funds.
“We’ve seen tremendous investment back into the operations over the last five years,” he said in an interview following his presentation.
Farmers have been buying land and investing in new equipment.
“While they’ve made a lot of money, there’s less in cash reserves maybe than they should have going forward,” said Johnson.
Large agribusinesses such as John Deere and Case IH have been putting cash reserves aside in advance of the anticipated downturn in the farm economy. Some growers have been saving as well, but others have gone on spending sprees.
Johnson foresees increased grain price volatility in the coming years.
“That will require more working capital. That’s your first line of de-fense,” he told the conference.
The easiest way to build working capital is to retain profits. Grain prices fell dramatically this year, but many growers experienced the best yields of their lives, so they should have the wherewithal to build working capital.
Another solution is to restructure debt.
“If they have financed things on very short terms, they could consider lengthening that out and actually take some of that cash back,” he said.
Many growers have been operating their farms with cash in recent years, but Johnson said it might be a good time to take out an operating line of credit to prepare for tougher times ahead.
“When you don’t need it may be the best time to get that loan,” he said.