As tighter margins pressure farm finances, lenders are seeing producers rely more heavily on borrowed capital to cover operating expenses. At the same time, higher interest rates are increasing the cost of carrying that debt, making cash flow management increasingly important.
“When we see a certain industry become more profitable, the average utilization of our operating lines, our revolving lines, goes down in the highest profit years. And then so as we have moved from 2023 to 2026, we’ve progressively seen the percentage use of those operating loans increase year over year. So it is a very relatable and obvious outcome of tighter margins as we’re seeing those balances increase. The challenge that we have today also, as everyone’s very familiar with, is interest rates are higher. When we were in the downturn 10 years ago, interest rates were lower on those operating loans.”
Chad Gent speaking with us, he’s the senior vice president of retail credit with Farm Credit Services of America.
He explains the impact of higher interest rates varies widely among operations, depending on their financial position and how much available credit they’re using.
“Today, that interest rate is higher. And so that does create an extra level of stress, as not only are you borrowing more money on your operating loan, but you may be paying a higher interest rate as well. Now, again, we see a huge diversity in our portfolio of those that still use their operating loans very little – those that had built up significant liquidity as I mentioned earlier maybe are only using a third to a fourth of their operating line, versus there’s others that are using 80 to 90 percent of their operating line.”
Government assistance can help producers navigate difficult years, but can’t always be counted on. Gent says lenders look for sources of financial stability when planning ahead.
“And that’s why the farm credit system has always been a strong advocate of strong insurance programs, because when we have strong insurance programs put forth by the government and with the strong subsidies we have today, that’s something that you can rely on and it’s predictable and brings a lot of value to our producers. The payments that our producers are receiving, especially the ad hoc payments, are certainly of value. And they certainly help cash flows, especially if they were going to be negative without it. But we also have to be careful of not relying on that on coming year after year.”
For farms working through today’s environment, Gent says careful evaluation of every expense can have a meaningful impact on the bottom line. He walks us through three key buckets.
“The first one really is, as we see significant differences in what we think of as cost efficiency of operations, digging into the input cost of the operations, whether that’s the traditional inputs of seed, fertilizer, chemical, optimizing those, not minimizing those, but optimizing those expenses to get the most bang for your buck. But it’s also all the other expenses that go into that operation. It can be 100 to 150 dollars an acre difference in being a great cost manager versus one that maybe isn’t focused on that. The second one is around family living expense. Inflation is driven the cost of living up a lot and figuring out are there ways to limit those expenses and manage those expenses. And then finally, debt and debt service. There’s a tendency for operations when we see losses in a given year or multiple losses over multiple years of wanting to restructure and term those losses out over a number of years. And most operations in that situation need to de-leverage, not re-leverage.