My, how farmers’ fortunes have changed.

After six years of eking by on thin margins and slowly draining working capital, high prices combined with government cash made farm balance sheets roar back to life.

“In the last year, most farmers made up significant ground on working capital deficiencies and are in good financial position now,” says Compeer Financial Chief Core Markets Officer Matt Ginder. “The massive dollars associated with government programs, from MFP to CFAP to PPP loans, combined with great pricing opportunities - these two things really brought farm working capital back quickly.”

Cash flow is better now, and higher prices mean grain inventories are worth more at the end of the year. To add icing on the cake, higher land values have improved equity and many farmers have been able to pay down debt.  

All that should mean an easy conversation with lenders this winter.

“Compared to the last six years, our clients are in a much better situation going into loan renewal season,” says Ginder. “We’ve seen a significant reduction in lines of credit utilization; operating lines are at historical lows.”

Cautious optimism

“For now, I’d say the farmer mood is ‘cautious optimism,’” says Ginder. “I hear the term ‘dry powder’ a lot. It might be a good time to stay on the sidelines, whether it’s a farm for sale or new equipment. I’m encouraged by that.”

Compeer Financial, a Farm Credit Cooperative serving Illinois, Wisconsin and Minnesota, looks critically at each real estate loan to make sure clients have sufficient cash or ‘unencumbered’ land for collateral. And, just because the farm economy is humming now is no reason to become sloppy with big decisions.

Super cycle lessons

“It’s been nearly 10 years since we came off the big super cycle, but it’s still fresh in our clients’ minds,” says Ginder. “A lot of them tell us the years following, when input prices came up as prices cooled off, were not enjoyable; there were lessons learned.”

Will high commodity prices persuade more senior farmers to retire and ‘go out on top?’ If the last super cycle is any indication, the opposite will happen in this uptick in the farm economy.

“The last time we had great financial times, farm careers were extended,” says Ginder. “A lot of older farmers said, ‘Hey, times are great why should we quit now?’”

That could be problematic for younger operators looking to move up in the management ladder. On the other hand, ag’s recent golden era did attract more young people back to the farm. Will it happen again? Ginder says it’s too early to tell.

Plan ahead

Tight supplies and robust global demand could mean high corn and soybean prices could stick around awhile. Extra income may have you thinking more about big purchases. If that’s the case, talk to your lender sooner rather than later.

“If you are contemplating buying more ground or a capital acquisition, the earlier you talk to your lender the better because that gives us options,” he says. “If we’re reacting to an issue or problem it reduces our options.

“Have that ongoing conversation with your lender, in good times and bad. Keep that line of communication open because communication and time create options.”

And meanwhile, enjoy the ride. Everyone who farms knows fatter margins can’t last forever. If you take a long look back at farm income adjusted for inflation, net farm income has run in a narrow channel over many decades. It has peaks and troughs and always averages somewhere near the middle.

“Prices go up, inputs go up, so margins don’t vary much over the long term,” says Ginder. “That’s inherent to producing commodities, because by definition you can’t charge a premium.”