Indiana Correspondent

LOUISVILLE, Ky. — With lower profits and tighter margins in the forecast for agriculture, financial experts report many farmers have prepared well for a possible loss of revenue.

The potential for less net income shouldn’t come as a surprise to farmers and others in the industry, said Dick Poe, senior vice president, financial services, for Farm Credit Mid-America in Louisville.

"This may be the most announced downturn we’ve had in quite some time," Poe explained. "We’ve been having this conversation for about the last year and a half. We expect a couple of lean years and we’ve prepared ourselves and our customers. We’ve told them to take action to help them get through the good times and the bad times."

Tighter margins due to lower commodity prices and rising input costs are putting a crimp in farmer profits, the USDA said earlier this year. Net farm income is projected to be $73.6 billion this year, a drop of 32 percent from 2014, the agency said. The 2015 number would be the lowest since 2009.

"The good news story is that we’ve come off 4-5 really good years and that shows in farmer financial statements and balance sheets," Poe noted. "We do expect a downturn and there will be stressed operators out there, those who didn’t plan well or didn’t heed the warnings. The overriding message is that many have done a good job of preparing themselves. There are always some who don’t prepare or started preparing later. I’m confident the majority have been preparing for this and heeding the signals."

Producers who find themselves unprepared should have a conversation with their lenders as soon as possible, Poe said, adding the situation won’t be solved by ignoring it.

Farmer debt-to-asset ratio is generally strong due to the good earnings producers have seen, he stated. Farmers are still buying property though land values have softened, he said.

"Operating loans are being utilized at a slightly higher clip," Poe said. "They’ve ticked up a bit. I expect that to continue as we move into the next couple of years."

Poe suggested farmers look closely at their costs and cut where they can.

"The biggest thing this situation calls for is a disciplined eye on cost reductions," he said. "In the good old days, some may have been a little less disciplined and they bought things they didn’t need. They got by with it. But today, you have to look at every little thing you spend money on."

While watching costs is important, producers shouldn’t go overboard and end up hurting their operations, said Todd Landrum, vice president of agricultural banking for Crossroads Bank in North Manchester in Wabash County, Ind.

"Don’t cut back to where you may hinder your yields," he cautioned. "For example, some are using conventional seed rather than triple stack. Just make sure you’re not cutting your yields in the process."

Landrum said financial health today depends on what farmers have done the past few years.

"Some farmers have money left over but we’ve also seen some increase in lines of credit," he noted.

"Some have paid off debt and cleaned up their balance sheets. We’ve had some very profitable years recently. In 2015 and especially as we head into 2016, I think we’re headed for a challenging time."

Bank officials use stress tests to help determine if an operation could handle changes such as an increase in interest rates, Landrum said.

"We’re trying to be good stewards of the farmers and we hope to lead them in the right direction," he said. "Guys who are older and maybe lived through the farm crisis in the 1980s are used to the cyclical nature of agriculture and aren’t too concerned, but those younger guys haven’t seen this side of agriculture yet. They could be the ones who are more nervous. They’ve only been in it the last few years when times were better."

When Freddie Barnard, an agricultural economist with Purdue University, gives a presentation, he’ll notice the ages of those waiting to hear what he has to say.

"I see bald heads and gray hair and I’ll think, ‘they’ve been through it, they understand it’," he said. "Going through the 1970s and 1980s, those lessons are permanently ingrained on the minds of farmers and lenders who went through that."

Producers who purchased land or equipment when times were better still have to make payments on any debt, Barnard said.

"Everybody has a different financial situation. Some had very little debt, and if they needed new equipment, they paid in cash and borrowed little or none. Others were highly leveraged and their financial situation wasn’t as strong. They may be squeezed. There’s always a segment that didn’t prepare, but overall, I think people have handled it well."

Excess rain and flooding in parts of the country, including the Midwest, could eventually impact farm profits, Barnard noted.

"A short crop this year because of the weather could turn things pretty quickly. It’s difficult to project that, though, because it depends so much on actual production."

Farmers who locked in multi-year contracts for cash rents may want to try to renegotiate with landlords, though that may meet with mixed success, Barnard stated.