Farmers and ranchers are already feeling the effects of credit tightening across the country and need to take a hard look at their financial situation, say Texas AgriLife Extension Service economists.
Good planning is the key to finishing out the year heading into the next crop season as agricultural producers utilize sources of credit to purchase seed, livestock and supplies.
The following are some suggestions for producers:
– Get more liquid.
“Make sure inputs generate sufficient income to justify the expense,” said Dr. Danny Klinefelter, AgriLife Extension economist. “Remember that maximum profit and maximum yield are not the same things.”
Shoring up loans is another consideration, he said. This encompasses long-term loans such as land and real estate, intermediate loans that include equipment and short-term loans used for operating expenses. “Make sure you’ve got your debt structured correctly,” Klinefelter said. “You might even want to consider restructuring some of your current debt. It may be good insurance to convert some short-term debt to a fixed-rate loan amortized over five years, even if it’s at a higher rate.
“The objective is to improve your working capital position and to become more flexible. You don’t want to get caught with a lot of carryover operating debt for the next year.” Farm Service Agency offers a guaranteed loan program. Borrowers who expect to face restricted credit may want to get ahead of the curve and start looking into this program before crunch time this winter, Klinefelter said. Fixed-rate, long-term loans have virtually dried up since the cost of these funds for lenders is much higher and their ability to match-fund long-term debt may not even be possible in today’s financial markets, he said.
Operating capital is also going to become more expensive, said Dr. Carl Anderson, professor emeritus and AgriLife Extension economist. “I see farmers and ranchers now paying 7.5 percent to 8 percent for operating loans,” Anderson said. “That’s going to really hurt when you go up 9 percent to 10 percent.” It’s even more difficult during times of record fuel, fertilizer and other input costs to make a crop or raise livestock, he said.
– Now may not be the time to be making significant capital purchases.
“De-leveraging is another option to keep in mind,” Klinefelter said. “Right now, unless farmers really get a good deal, they don’t want to over-commit themselves.
“Also, if they aren’t on share rents, then try flex rents (adding flexibility to a cash rent basis) instead of cash rents,” he said. “Another alternative to a straight-cash rent would be to try and build in bonus and disaster clauses.”
– Use options or buy puts as part of risk-protection strategy.
“This can be a helpful strategy to mitigate exposure to price risk, especially with the volatility we’ve seen this year in commodities,” Klinefelter said.
– Evaluate your crop insurance program.
“Products that offer a revenue guarantee in case of lost production or falling prices are a vital component of a risk-management strategy in times of volatile prices and given the risky production environment we have in Texas,” said Dr. Mark Welch, AgriLife Extension grains economist.
– Evaluate alternative business models.
Klinefelter said producers should consider joining forces and pooling together to gain access to expertise and economies of scale.
“Producers could form an LLC (limited liability company) or a closed cooperative to combine their buying power or to spread the cost of acquiring greater technical expertise or risk management.”
Have a complete and accurate set of financial statements ready before approaching a lender.
This can improve your ability to maintain access to credit and shorten the turnaround time on your request, the economists said. “It’s an advantage for a producer who’s going to a lender to already be accountable for what you are doing,” Welch said. “That may put you at the front of the line. You better be planning ahead.”
Overall, it’s more important now than ever for producers to make operations as efficient as possible. “No doubt, they’re going to have to ratchet up their management skills,” Klinefelter said.