As harvest progresses across the Midwest, farm lenders are seeing very different financial conditions from one operation to the next. Chad Gent, senior vice president of retail credit for Farm Credit Services of America, says some producers are positioned to grow, while others are focused on maintaining financial stability.
“So we kind of have almost a tale of two cities or a tale of two industries here of what seems like the best of times and the worst of times, at least on the surface. But on the grain side, we have a mixed bag in the Midwest of weather patterns that were either too dry or too wet in some areas. And so the initial yield feedback we’re getting there, they’re all over the place. We’ve got people with record yields and people that are really challenged. So, the experience of our customers is going to vary significantly. And we’ve been on a path the last three years, really, of migrating from a very high profit grain industry to one that’s moving to what we would call a more normal environment of very tight margins.”
Gent says those differing conditions are shaping how lenders work with producers. While some farms are pursuing new opportunities, others are adjusting to that tighter margin environment.
“Some are doing just fine and are looking at opportunities to expand and grow. And we’re here to support that growth. And we have other customers that are finding themselves – the market took a turn at a bad time after they had maybe done an expansion or didn’t have the liquidity or had more debt maybe than they should have had for a tighter environment. And so we’re also working with those customers, with financial counselors to work through a more challenging environment and looking at how do they make changes to survive and stay in business and maintain their business.”
Regardless of commodity or operation size, Gent says lenders are looking at a few key indicators when evaluating whether a farm is prepared for growth.
“There’s two main factors that really drive an operation’s ability to grow, expand: and that’s liquidity, how much working capital they have, and then what is their debt service? What is their debt load when we look at how much debt service do they have on an annual basis relative to the scope of their operation, the profitability of their operation? So those operations that are entering or in this tight margin environment with limited debt service or sustainable debt service, we call it, of they can make their payments comfortably in this environment and they have liquidity to offset the risks that we have with extremely volatile markets right now. Those are the operations that have flexibility to do new and different things.”
Gent says success today depends more on financial management than scale.
“We’re seeing success in operations of all sizes, too. I mean, when we were in a higher profit margin arena for the grain industry in the early 2020s, that was a really different world in that the scale was going to drive a lot of profitability. The bigger the operation was, the better. And these large operations made a tremendous amount of money. Today, it’s really about the best managed and the best financially structured operations are the ones that are the most successful. So size isn’t indicative of strength today. There’s some large, strong operations and there’s some smaller, strong operations and vice versa. So that’s a real difference from just three years ago.”
Gent says overall, agriculture remains in a stronger financial position than during the last major period of tight margins. He says operations with manageable debt levels, adequate liquidity, and strong financial discipline are best positioned to weather volatility and capitalize on future opportunities.