AG Resource Management Blog - Credit Crunch in Farm Country (Part 1)
THE LAY OF THE LAND
Anyone in the field can tell you that agriculture has evolved drastically over the past 10-20 years. From equipment, to seed, to the integration of technology, every aspect of the industry has shifted to help today’s farmers be as agile, productive, and profitable as possible. However, every efficiency comes at a cost somewhere, and farmers are feeling it when it comes to credit and acquiring the capital they need to operate. This leaves a lot of farmers at a crossroads as they look for cash flow solutions. Leroy Startz, Director of Market Channel Development at Ag Resource Management, has been working with both operators and lenders for years and has some insight and solutions for today’s credit crunched operator. In this blog series, we’ll explore the changes in agriculture finance and how today’s farmers can stay funded into 2020.
A SHIFT IN AGRICULTURE LENDING
In order to get a handle on the best solutions, Startz says it’s important to understand the recent changes in agriculture business models. “The overall picture of Agriculture Lending has shifted dramatically in the past 10-20 years.” says Startz. “And a big piece of that lies in land ownership.”
“Ownership of land has been shifting from farmer owner to investor owner,” Startz explained, and with that comes a shift in costs and margins. He elaborates that “land is now being rented back to the operator at values that are considerably higher than what they were when the farmer owned the land and may have actually had it paid for. Now that it’s being owned by an investor, the investor has to rent it out at the current cost value. And that becomes an increase in operating costs.”
That’s just one aspect. This evolution in operating models has also affected input providers, and thereby, the farmers they work with. As Startz says: “There’s been a considerable amount of consolidation that’s taken place in the ag input space both from the supplier manufacturer side and the distributor side. And a lot of that merger activity took place at the expense of the acquiring companies’ balance sheets.”
A SHIFT IN OPERATING MODELS
That input consolidation, while efficient and competitive, comes with a shift in operating models.
“There may have been numerous small independent distributors who were acquired by a big regional or national corporate distributor. Prior to the acquisition, they may have been able to provide a certain amount of trade credit in their trade territory”. Now that they’re part of a larger corporate structure,” those efficiencies that were brought to the table by the larger acquiring entities may have changed the dynamics of the independent, local distributor and caused a decline in available credit that had traditionally been made available to that farmer in that region by that retailer. “Startz says.
He also says that this is just the tip of the iceberg.
“The other thing that really needs to be addressed is that we’ve been through 6 or 7 years now of really low commodity prices. And while a lot of our farmers from across the country have been able to survive, it’s been at the cost of equity. Their balance sheets have been strained because they have had to tap into the equity of their land and the equity of their equipment in order to keep operating. And so there’s strain being put on those balance sheets today when 10 years ago we had a good run at high commodity prices and really good yields, cash flow was abundant, there was a lot of extra money in the pockets of farmers to invest in their equipment and acquire precision technologies maybe even make additional land acquisitions or infrastructure like grain storage etc. We just don’t have that today. Cash is strapped. Every day is a day people are looking to try and find a way to source enough capital to operate when the equity continues to decline.”
He’s right of course. These shifts are enough to make any farmer rethink their strategy. But what solutions exist for today’s farmer operating in a credit crunch? What new modern solution exists to source capital? Here, Startz is full of meaningful solutions- and caveats.