Ever wonder what your banker thinks about your operation? Or their view on the current state of the industry? We talked with our team of agribusiness bankers and here’s what trends and topics are on their minds.
We hear this one often:
“Are Banks Lending Money in Ag Right Now?”
Yes, there are banks still lending in the ag sector right now. However, as some banks struggle with their ag portfolios or small banks stop lending, those top-tier ag customers may have to start looking elsewhere for their financial needs.
While credit should continue to be available to most producers, you should expect more discussion about cash-flow adequacy. Lenders will focus on the balance between input costs, production yields and grain prices, along with the potential for operational losses, especially with less efficient producers. Farmers should forego unnecessary expenses and capital purchases unless they are sure cash flows will cover land and equipment payments as well as unforeseen expenses.
Yes, It’s Still True – Cash is King
Working capital and liquidity have become – and will continue to be – critically important in the coming years. One of the major factors we saw in the 1980s farm crisis was the issue of liquidity. Farmers and ranchers didn’t have enough liquidity to make it through the down cycle. And while having liquidity is not necessarily the “farmer way” because of their propensity to buy land, equipment and fill the bins, it is important to have cash available during challenging times.
This can be achieved with having the right bank and banker support, as well as the right structure and credit products available. The goal for many will be to survive the current grain price levels and get ready for improved prices in 2018 and beyond.
What’s the Deal with Interest Rates?
With the historically low interest rates we’ve experienced for almost the last decade, many ag producers have been lulled into forgetting that interest rates can change as fast and dramatically as corn prices. As the economy improves and the Federal Reserve Bank looks at beginning to ease its security purchasing program, the stage is set for a return to a “normal” interest scenario during the next couple of years.
As that happens, producers with large floating rate exposure can expect to see their interest expense double or even triple during that time frame. The spread between fixed and floating rates may also expand, regaining its historical gap. When that happens, borrowers with purely floating rates will be at the mercy of the financial markets in terms of controlling their interest expense.
By fixing rates now, with proper use of fixed assets as collateral, and carefully forecasting future operational cash flows, producers can effectively lock in today’s lower rates, save themselves tens of thousands of dollars or more in interest expense, and be far better prepared to effectively manage other variables that may come into play.