As farm budgets get tighter, bankers are growing more anxious. Some farmers are taking some unique steps to help secure credit, even bringing in back-up expertise to help them plead their case for securing operating loans.
Steve Gauck, a field agronomist for Beck’s Hybrids in southeastern Indiana has gone with farmers to meet eight to 10 lenders since harvest.
“Some of my customers have invited me in to the meetings to show the banker what it takes to grow corn and why it is important,” Gauck said. “I just try to explain things and help the banker understand why corn may cost more to put out but also why it can be a better return on the investment. I show them the benefits of the right seed and proper fertility and talk about how some guys are putting their nutrients down for both corn and soybean before corn. That can look like a lot of money up front, but when you break things down for them it can make it easier to understand and they can see the potential. Some of the conversations have been interesting.”
Gauck has encountered varying knowledge levels about agriculture from the lenders he has worked with on behalf of his seed customers, but has found them to be receptive to learning more about the challenging situation facing corn and soybean growers.
“There are some excellent bankers who really understand agriculture,” he said. “I think there is a lot of pressure from higher up than the loan officer for them to be able to justify these expenses. Some of them are surprised when they see how high the costs of soybeans can actually end up being and how we can work to push corn yields higher for a higher return.”
Though farmers bringing their seed guy to meet with their banker has not necessarily been the norm in previous years, Gauck sees value in developing more of these kinds of relationships in the future.
“In the past there hasn’t been a lot of that kind of thing but I think more of a team approach to this is going to be important as times start getting tough,” he said. “I would encourage more growers to get together with their seed and fertilizer guys on some of these kinds of things.”
Even with teamwork, though, the high risks and big dollars required to plant a crop in 2016 are raising concerns with lenders that could ultimately shape the realities of the 2016 growing season. There are differing opinions of how things will develop as spring planting season approaches.
“I have heard about a couple of young kids who were farming pretty hot with most of their 2,500 acres rented and Farm Credit pulled their operating loan for this year,” said Ron Strasburg, owner of Strasburg Financial Group in Wapakoneta. “Cash flow is going to drive credit concerns from lenders. I fully expect a heavy shift from corn to soybeans this year because soybeans are cheaper to put out. I am already hearing that guys are shifting to soybeans — maybe a 60-40 shift or 70-30 shift to beans or more. The banks may only give you so much and that will be a factor in going to beans so they can reduce that cash output.”
Cash supplies are going to make a big difference in the coming months.
“Some of my clients went through Chapter 11 bankruptcies back in the 80s and they managed to keep everything. They are doing well now after making pretty good margins, saving up cash and reducing debt,” Strasburg said. “There is a group out there though, whose dads went through the 80s, with a couple of million dollars in new equipment and a couple million in debt to go with it and they are getting uncomfortable.”
This year may be tough for some, but Strasburg sees 2017 as a very crucial year for many corn and soybean farms.
“I think 2016 will still be OK. There will be minor incidents here and there where people are not going to get their operating loan and banks will be looking for second mortgages. But I don’t see grain prices going anywhere but south from here and I think 2017 is going to be the tough one,” he said. “When corn gets below $3 things will change quickly. Inputs are still high and it takes a year or two for the seed and chemical guys to pull back on their prices. That will help, but there is always a year or two lag after grain prices go down while the inputs are still full price. The guys who have saved surplus cash will be in good shape in 2016, but by 2017 that surplus cash will be gone and things will get tougher. It will be interesting to see what happens. Today farms run on massive amounts of credit to put crops out and I think we are going to start seeing some high levels of discomfort by 2017.”
While tight credit allocations may favor soybeans, actual farm economics still favor corn, according to Ron Barga II, CFO for Premier Crop Insurance and ag loan consultant for Greenville National Bank, who works with farmers around the state.
“I don’t think credit will affect corn acreage. It depends on who their banker is. I look at the gross numbers on soybeans and do the math. With 54-bushel beans, the best price you’re going to get may be $8.90 or $9. That is only $480 of gross revenue. Most costs on beans are hovering around $500 to $525 an acre. If you can do 175-bushel corn at $4, you are now grossing $700 and I know plenty of guys with a cost of production of $500 on beans with their corn costs down around $700, so at least they are breaking even with corn,” Barga said. “With corn, there are more gross dollars to cover their fixed costs. Corn cost numbers are higher and that can cause bankers issues, but the lower cost of beans won’t let them gross enough to cover their fixed costs.
“There are plenty of bankers out there too worried to do those loans, but I would be shocked if we see a big shift away from corn. All of the farmers I am working with are sticking with their normal rotations of recent years — some guys I know have already been heavier on beans because of cash flow reasons. My opinion is that credit may play a part in 2016 acreage, but not as big of a part as some people may think.”