Lenders will be particularly concerned about the working capital producers will have to buffer lower incomes and potential lossesmdashGetty ImagesAndrew Burton

Lenders will be particularly concerned about the working capital producers will have to buffer lower incomes and potential losses.—Getty Images/Andrew Burton

In tight times, working capital and lender relationship are vital

It’s a common discussion these days: With markets in the doldrums and input costs high, things are going to be tight in farm country this year, and farmers will be looking at budgets carefully for things to trim.

Net farm income for 2015, the USDA says, was down 38 percent over 2014, and over 50 percent from its peak $123 billion in 2013.

“Prospects don’t look much better for 2016,” ag economists Michael Boehlje, Michael Langemeier, and Ken Foster note in the Purdue Agricultural Economics Report. “Current Purdue estimates of crop returns suggest large losses per acre if all costs of production are included.”

“Current Purdue estimates of crop returns suggest large losses per acre if all costs of production are included.”—Getty Images/Chung Sung Jin

While crop insurance and farm program payments “will continue to buffer the risk … they will not be as effective in reducing the downside as in the past. In particular, crop insurance revenue guarantees are substantially lower than during the high grain price years.”

This narrow margin period could last for several years, the economists say, and they offer observations on coping with tight times.

• Maintain working capital. Lenders will be particularly concerned about the working capital producers will have to buffer lower incomes and potential losses. A frequently suggested goal is working capital that is 15 percent to 25 percent of gross revenue or total expense. “Maintaining a strong cash position is an important way to manage working capital.”

Check current commodity prices

• It may be necessary to improve the working capital position by selling capital assets that aren’t a critical part of the farm business: excess machinery, a less productive farm. But in doing so, be sure to consider tax/depreciation and capital gains/losses ramifications.

• Work closely with your lender. “Visit early and often … concerning any events that might have an impact on your ability to repay your debts.” Share your plans for dealing with financial stress and have evidence to support those plans. Prepare detailed financial statements. Discuss how you plan to control risk.

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This period of agricultural adjustment may last several years, the economists note, and managers need to understand their working capital position and how to manage it. “Lenders will become increasingly important in help farms to manage through these tight financial times.”

Read their entire analysis and other articles here.

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