WEST LAFAYETTE, Ind. — Many farmers are finding themselves with less cash and working capital, making it more difficult to secure loans and purchase items needed for their operations, according to a professor of agricultural economics at Purdue University.

 

“Working capital is tight and continues to get tighter because margins are so tight,” Michael Langemeier said. “Margins have been getting tighter since 2013. When liquidity is so tight, it’s harder to get loans and there’s less cash in the market to buy land and machinery.”

Generally, farm operators should strive to have working capital – current assets minus current liabilities – equal to 35 percent of gross revenue, he said. Percentages below 20 could signal a significant problem.

Fewer than 10 percent of operations were close to or at the 20 percent threshold in 2013, Langemeier said. Today, he thinks fewer than 25 percent could be close to or at it. “The amount of working capital varies tremendously among producers,” Langemeier noted.

“There’s a certain group that doesn’t have much working capital left and another, still in a fairly good position.” How – or if – farmers spent their profits from 2007-13 is probably impacting who has more cash today, he explained.

“There were varying degrees of how aggressive some farmers were in buying assets. Some spent their higher earnings from 2007 to 2013 on assets such as land, equipment, tiling and storage bins.”

Declines in working capital may make it more challenging for lenders to approve loan requests, said Evan Hahn, senior agribusiness analyst with Farm Credit Mid-America. Those lenders try to understand the factors that may have led to a loss of working capital, he added.

The decline in working capital started about two years ago, but it’s accelerated more recently, Hahn said. “As farm income has risen and come back down, their fixed cost structure needs to be flexible,” he noted.

“For some farmers, this downward trend will continue until one of two things happen: prices rebound to higher levels, or until they work on their cost structure. They have to do a detailed break-even calculation first; they have to know those numbers. They need to look at their fixed and variable costs.”

Lenders will work with farmers, especially those with tighter working capital, who may want to make a large purchase, Hahn said.

“We try to open a dialogue. What’s the consequence of buying versus not buying? Does it increase efficiency? Does it increase productivity? We’re just making sure if it makes sense.”

Declines in cash and working capital have been gradual, said R.D. Schrader, president of Schrader Real Estate & Auction Co., based in Columbia City, Ind.

“It becomes an issue of how much equity farmers have,” he said. “It creates tensions. It’s a situation where they can’t take advantage of opportunities.

“There are operators across the entire spectrum (of having cash on hand). For those on the low end, it’s tough for them to do things. But operators can adjust to a slow, gradual shift.”

Lenders may be cautious in determining whether to approve loans or the amount of a loan, said Howard Halderman, president of Halderman Farm Management and Halderman Real Estate Services, based in Wabash, Ind. Farmers may be asked to provide more collateral, a larger down payment or receive less favorable terms. “They may be able to generate cash by taking out additional mortgages on land or by selling assets,” he said. “Farmers want to be independent. The more constrained you are, the less independent you can be.”

Langemeier recommends farmers be extremely cautious in buying assets. They could also consider restructuring their debt as a way to stretch out debt payments. “They need to know their cost of production,” he explained. “It’s hard to know how to cut costs if you don’t know where you stand now. I think there are some people who don’t track costs as well as they should. Keeping records and record analysis isn’t the most fun thing for farmers to do.”