The Farm Credit University Commercial Ag Lender class provides a forum for discussing the economic landscape of agriculture and agricultural lending. The recent class brought together ag lenders from across the U.S. and Canada, along with a producer aspiring to become a lender. The real-time reconnaissance from the participants revealed some interesting twists and turns.
Where are the cattle margins?
Here are the highlights in the livestock sector:
Strong cattle prices continue to pressure producers’ financial liquidity. Yes, revenues are strong, but higher input costs and interest rates (which have doubled) have tightened margins. Double-digit inflation in fuel, fertilizer and machinery repair costs is placing additional stress on operating lines of credit. Producers are willing to chance the market rather than use formal contracts and other marketing and risk management tools to protect margins, and that is a concern noted by class members.
Inflated expenses and higher interest rates are exerting greater pressure on cash flow and working capital. Financial liquidity and repayment capacity are growing concerns, despite strong balance sheets supported by land equity.
The strongest operations, overall, are those that maintain and preserve adequate liquidity, manage financial leverage, and exercise discipline in controlling costs in both the business and family living.
Credit is tightening
In both countries, agricultural lending standards are tightening. This is especially apparent in the grain, row crop and specialty crop sectors and, to a lesser extent, in the aforementioned livestock industry. This trend is also evident among traditional lenders and input suppliers.
Nontraditional lenders are adopting credit practices more closely aligned with those of traditional lenders and private equity firms.
Businesses in a growth mode that have historically depended on borrowed capital are now facing interest costs that have doubled, dampening expansion plans.
Lenders are closely monitoring businesses that repeatedly refinance short-term obligations, particularly operating lines of credit. They are also watching those that are delaying maintenance and input purchases because of cash flow pressures.
Regardless of whether they are livestock, crop or diversified operations, businesses with understated cost structures and poorly defined fixed and variable breakeven levels receive increased scrutiny from lenders.
Farmers: Talk to your lender
During a credit-tightening cycle, proactive communication and gradual adjustments are recommended before major financial problems arise. The focus for both lenders and producers should include closely monitoring working capital and operating lines of credit.
Next, evaluate how financial sensitivity affects the income statement and cash flow statement, and ultimately the balance sheet. The ability to assess, adapt, execute and monitor is critical for both businesses and lenders.
Side note: Farm Credit University offers multiple curricula for both lenders and producers and has provided educational programs to more than 8,000 individuals across the nation during its 20-plus years of existence. It is a classic example of how education, the exchange of ideas, and exposure to new concepts and principles can be integral parts of the lifelong learning process.