If you plan on buying farm equipment soon, also plan on an in-depth discussion with your lender. That's the gist of what Jerry Lehnertz, senior vice president of AgriBank Farm Credit in St. Paul, Minnesota, told me recently. Sure, loans for farm equipment are available at historically low interest rates, and prices on equipment -- especially used machines -- are at sharp discounts. But before approving a machinery loan, lenders want to hear more from farmers now than they did a few years ago.
Reasons are obvious. With lower commodity prices and lower incomes, farmers will have to convince lenders that a new tractor, combine or planter has good potential for return on investment. That contrasts to the recent boom years when some farmers -- and maybe some lenders -- let exuberance override caution. Lehnertz said: "It's human nature. When times were really good there was a loss of discipline in putting pencil to paper as to what made sense for return on investment for new equipment."
In describing how we got to this point in the farm equipment buying cycle, Lehnertz recalled the recent past. In the mid-2000s when commodity prices spiked, "Farmers were aggressive in building their equipment lines, particularly tractors, combines sprayers and planters." Investment in machinery "per acre or contemplated bushels produced went up pretty dramatically, in some cases 20-30%."
In other words, some farmers became equipment rich.
The flood of new purchases gave manufacturers and dealers a huge boost in sales and put a lot of iron into the pipeline. When commodity prices dipped, farmers slowed their buying spree; they had already bought the equipment they needed.
"The conclusion to this story is reduced prices on both new and used equipment," Lehnertz said. "Farmers are hunkering down and are willing to run their existing equipment longer."
That spells bad news for manufacturers and dealers. In some cases, it is bad news for farmers, too. If a farmer financed more equipment during the boom than he now can justify, sizable payments and reduced income could be eating his business alive. "We are seeing some operations with pretty large dispersal sales of equipment; some are going out of business," Lehnertz told me.
A more common scenario is that farmers are selling off that "extra" tractor or combine that they bought during the commodity price surge. That will mean some inconvenience and perhaps more time in the field, but many producers can handle that. Of course, the price they get when they sell that extra piece of equipment in a saturated market will be significantly lower than they would like.
Many producers originally bought that equipment with cash. When they sell for a loss, Lehnertz said, "The pain is with the producer, not the lender."
The pain for most does not approach that felt in the 1980s farm crisis, Lehnertz said. He knows this from personal experience. In the 1980s, he was both a part owner of a farm and a Farm Credit employee. Economic conditions are "dramatically different now. We had double-digit inflation in the '80s," he told me. Interest rates were also in double digits. Today, there is little or no inflation and interest rates are so low, some lenders "are almost giving money away."
Land values now are holding relatively steady, unlike in the 1980s, Lehnertz said. He expects to see some contraction in land values but not as severe as three decades ago.
Also on the plus side for today's producers: "Management on the farm is much more sophisticated than it was in the 1980s," Lehnertz said. As evidence, he pointed to farmers' quick reaction to current conditions: "Investment in equipment per acre is declining."
Importantly, from a lender's viewpoint: "There is more willingness on the part of producers to listen to a lender when he says, 'This is what you need to do to right the ship,'" Lehnertz said.
This year is Farm Credit's 100th anniversary, Lehnertz told me: "Our mission is to be with farmers in good times and bad. Not every farmer is going to survive a down cycle, but many will and we intend to be there for those who do."
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