With a big crop, and slacking demand, Ohio State university agricultural economist Matt Roberts is advising crop producers to prepare for the storm ahead.
“There will be serious financial stress in the row crop sector in the next few years. There are a lot of farms that have expanded rapidly and have weak balance sheets,” Roberts said. “If we see $3.50 corn and beans at $7 to 7.50, I think there will be bankruptcies and dislocations. To a lot of farmers, I think there is real existential risk in the next few years and the time to prepare for it was the last three years.”
Some economists are predicting even tougher times where farmers are forced to cover multi-year crop losses with capital from selling land that has plummeted in value because no one has the money to buy it. No matter what the coming few years hold, Roberts said the best defense is cash.
“The heart of a farm business is its balance sheet. Crop insurance only protects you for a year. The next layer of protection is in farm bill programs like ACRE, which is ideal for the scenario we are going to be seeing. The cash on the balance sheet is going to be what keeps farms in business. That is what will absorb the losses,” he said. “Many farmers look at their balance sheets and see the equity in their land, but lower crop prices lead to lower land prices and that equity can be quickly diminished. Pay some taxes and save cash to increase the working capital on your farm.”
In order to prepare for the impact of lower prices, Roberts suggests that farmers build a working capital cushion of a year to 1.5 years of land charges above what they typically need to operate, he said.
Other ways growers can prepare include:
- Avoiding machinery and building expenditures just to take advantage of section 179 is an easy way to build capital.
- Refinancing any and all loans and mortgages into 10-year fixed rates.
- Holding off buying land or entering into multi-year leases.
- Carefully evaluating living expenses.
“Prices reflect that we have moved from an era of scarcity to one of adequate inventories and prices have responded by moving lower,” Roberts said. “We are already seeing lower prices come into the market, and unless U.S. or South American acreage declines, those prices are likely to continue to move lower.
“The prices we had earlier in the year aren’t guaranteed to return.”