This fall and winter’s renewal season is going to be more challenging to producers and lenders as the economic cycle intensifies. The uncertainty surrounding trade sanctions and tariffs with our major trading partners raises tensions. Couple this with extreme weather around the globe and more international competition. Given the situation, questions concerning the longevity of this economic cycle make a good case for strategic thinking and planning.

Refinancing and restructuring of operating losses on lines of credit that cannot be paid off will be a major task ahead for us in the agriculture industry. The terms of a debt restructure and the amount of additional security in the form of pledged assets and equity will require one to weigh the variables.

Bridge or pier?

When a producer or lender assesses the situation, one has to determine whether a bridge is being built to future profits and cash flow. On the other hand, does the debt refinance take a business out to the end of the pier where the debt, or the water, is deeper, the options become fewer, and the chance of poor outcomes increases?

It has been my experience that even well-managed businesses will occasionally need a debt restructure. However, a sense of urgency by both the borrower and lender is the first line of defense when building a bridge. Procrastination and failure to implement a plan and action can often compound the losses. With today's larger businesses with more zeros and commas on the financial statements, losses can quickly be magnified.

In the building of the bridge, one has to make tough decisions. What are the areas where costs can be cut? This often requires one to examine the quality of rented land, its location, and proximity to business headquarters. If inputs are an issue, you may have to scale back. How would this impact productivity in the short and long run? What are you good at and plan to continue to do? What actions do you need assistance with to accomplish a positive outcome?

Given the changes in the marketplace, how will a debt restructure impact the future cost of production, breakeven points, and business competitiveness? What is the cost of living and how can that be adjusted? What changes are needed in the marketing and risk management plan to move one back into a positive economic position?

The pier

The businesses and managers who do not act on responses to the aforementioned questions will often be back for a second or third debt refinance. Of course, this results in bad or ugly debt on the balance sheet. Multiple debt refinances can very quickly move a business to the end of the pier where one often finds the business drowns in debt.