In the 1980s, bankers defined high-risk borrowers as those with debt-to-asset ratios over 40%. By no coincidence, that segment swept up young farmers or parents who expanded to bring young farmers back to the home farm. One of my favorite economists described the debts of the young not as greed but as the misfortune of being born at the wrong time.
This time around, the at-risk farm segments are those who cash rent more than half of the land they farm, ag lenders and ag economists are finding. Some of these likely are young farmers, but some are also established operators who expanded rapidly on the fumes of $8 corn.
Unfortunately, cash rents throughout the Corn Belt haven't adjusted nearly as quickly after the commodity price crash. Recent Iowa State University surveys show average statewide cash rents have only slipped from a peak of $270 per acre in 2013 to an average $230 per acre by 2016.
As I mentioned in my last post, University of Illinois economist Gary Schnitkey estimates that a typical Illinois corn producer lost $101 per acre in equity in 2015 on cash rented land while those who owned their land lost about $1/acre (see http://farmdocdaily.illinois.edu/…)
Heavy reliance on cash rented acres could be an early indicator of which farms will experience financial stress if corn prices stick under $4, agrees Dwight Raab, a co-author of several other recent studies of Illinois Farm Business Farm Management records. "Higher levels of cash rent (as a percent of total acres) has brought on some additional risk to farm operations--more risk than we thought it did," he says.
In a recent posting on farmdoc daily, Raab and co-authors Bradley Zwilling and Brandy Krapf analyzed the long-term repayment capacity of 5,700 Illinois FBFM members based on actual financials between 2003 and 2015. On a per-acre basis, those who rented 25% or less of their land base reported the highest median repayment margin every year except 2007. There were only three years when the 100% cash rent operators did not bring up the rear, showing the lowest repayment margins, the study found.
(To read the farmdoc daily report, go to http://farmdocdaily.illinois.edu/…).
More troubling, a similar study by the same authors tracked the working capital and liquidity levels of Illinois FBFM members from 2003 to 2014, again broken out by percent of cash rent acres.
No surprise, they found an inverse relationship between the percent of cash rent acres and liquidity. Working capital differences were magnified in years of stress. For example, operators who rented 25% to 50% of their land base held about $70 per acre more working capital than the 100% renters from 2003 to 2008. After the steep drop in commodity prices, that gap widened to a $190 average advantage per acre from 2012 to 2014. Bottom line: Farmland owner-operators have more staying power.
"Working capital is the liquid part of your net worth," Raab says. "It is the gas in the tank that gets you from Jan. 1 to Dec. 31 each year," he says. At the height of the commodity boom in 2012, some operators held $800 per acre in liquid resources.
The problem is that working capital has been rapidly depleted the past three years. After the steep decline in commodity prices from 2012 levels, average FBFM operations accumulated roughly $200 per acre losses by 2014, Raab notes. And as Schnitkey reported, corn growers may have lost another $100 per acre last year.
University of Illinois economists point out that corn growers will need to shave $50 per acre off 2017 average budgets (based on trend yields and current price forecasts) just to break even, much of that coming from rents.
"Cutting rent is hard to implement in practice, because if you give up land you can't cash flow, you may never get it back," Raab says. "And if you try to maintain control with the hope of a profit in the future, you need your lender's support."
(To read how the percentage of cash rented acres affects liquidity, go to http://farmdocdaily.illinois.edu/…)
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