October 14, 2008

Farmers need to prioritize how to spend money

An outstanding article by Elizabeth Williams appeared on DTN today and covered the gamut of what farmers, lenders and others are thinking as they watched the stock market crash last week and the bottom fall out of the grain markets - and things to consider before spending money. Click here to view the article.

It's no secret that ag land values of soared significantly over the last few years as grain prices moved up. It begs the question as to whether a "correction" - like in the housing market - will happen at some point. Although not addressed specifically, there are reports of buyers holding off hoping for land prices to drop. That's a scary thought, but at least with land you own "something" and not just a piece of paper that entitles you to another piece of paper like in the derivatives market. But that’s not much of a consolation prize when the bank calls.

The significant drop in commodity prices over the last few weeks has cost some farmers big. Holding off selling a couple thousand bushels of beans was easily a $14,000 lost opportunity. What happens of commodity markets stay low? Will land buyers stay away? Will rents be renegotiated? Will farmers cut back on inputs? Pay down debt? Put off a new piece of equipment?

Farmers have "a lot at stake," and the situation they find themselves in is a big deal, Bob Johnson, a Hastings corn and soybean farmer, said in the article. Johnson told Williams he won't cut back on inputs such as fertilizers or seeds, but he is being careful about debts - and rightly so. During the 1980s, he served on a board that studied farmer financial situations. From that experience, he recalls that farmers should always own at least 50 percent of their assets.

A bit of silver lining: With falling grain and other commodity prices, fertilizer prices have dropped, too. DTN said wholesale urea plunged about 40 percent and DAP prices fell about 20 percent. The trend is expected to affect everything from ammonia to UAN.

And, finally, an important note from Brian Kuest, a consultant with LeMaster and Daniels in Quincy, Wash.: Anyone who borrows operating money will need to put a sharp pencil to their operations and make sure they are profitable and meet their lender's appropriate targets. For most, that means you need at least 15 percent of your 2009 crop costs on hand in cash before the lender will lend you the remainder for your operating line. Producers need to be prudent in their long-term purchases, especially in equipment and land. Don't dilute your liquidity. It's not a good year to take undue risk.

There's a lot more in the article, including details on the importance of lining up credit, so be sure to check it out.

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