I recently addressed the American Bankers Association National Agriculture Bankers Conference in Omaha, Nebraska for the 37th consecutive year. I tell people I started giving speeches at this convention when I was 10 years of age, but no one believes me! This Super Bowl of education and learning over four days leaves attendees chock-full of information and ideas. In many sessions, discussion ensued concerning the borrowers who were going to struggle in the coming years as agriculture economics transitions. Three specific groups to watch are those businesses that utilized too much of their profits and working capital to purchase land, those who acquired machinery to reduce income taxes and those with high debt levels.
Jason Henderson at Purdue University and Brent Gloy, formerly at Purdue but now a Nebraska producer, presented an interesting session concerning farm debt. Real estate debt as a percentage of total farm debt has increased dramatically since 2009. Farm real estate debt is now up to 60% of all debt compared to 54% at the peak of the farm crisis. Farm real estate debt is 10% higher than in 1997. Purchasing a non-financially liquid asset such as land is a recipe for possible repayment issues should commodity prices continue to be suppressed.
Those who purchased machinery to reduce taxes have higher overhead cost, increasing cost of production and pushing deferred taxes into the future. Deferred taxes could be the economic tsunami that could hinder repayment ability and liquidity in the years a producer cannot utilize these strategies as a result of economics.
Another set of borrowers who will struggle will be those that cannot get a handle on family living costs and a strategy to reduce that cost. Lenders at the conference discussed wide variation in individual living cost ranging from $50,000 to $80,000 difference from the top to the bottom one-third of family living budgets. One lender who conducts analysis in this area on grain producers found that low-maintenance families on average spent about $80 per acre family living cost while the high maintenance on average withdrew $240 an acre equivalent. On one thousand acres, this would be the difference between $80,000 and $240,000, or $160,000! As Bob Craven, of the University of Minnesota Center for Farm Financial Management later stated, family living expenses are one of the largest competitors for cash flow.
Next time I will cover more on struggling borrowers.