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Thursday, September 29, 2016

Grain Farm Working Capital Nearly Exhausted

ifr160930–128
Grain Farm Working Capital Nearly Exhausted
Gary Schnitkey, Agricultural Economist - University of Illinois

Four consecutive years of lower commodity prices has nearly exhausted the financial resources of U.S. grain farmers. Todd Gleason looks into the problem with an agricultural economist from the University of Illinois.

Working capital is used by farmers…
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Working capital is used by farmers to buffer their low income years. They do this by building up their bank accounts, grain inventories and other assets during years of plenty. A review of the farms in the Illinois FBFM recording keeping service shows farmers did that from 2006 to 2012 says University of Illinois Agricultural Economist Gary Schnitkey.

Schnitkey :25 …working capital anymore.

Quote Summary - So, that was the era of high commodity prices and high incomes. Farmers increased working capital, then, and now we are in the process of reducing again. By the end of 2016, it will be at about the same levels it was from pre–2006. These are tight levels without large buffers of working capital.

There comes a point, says Schnitkey, as working capital declines at which it can no longer be used to meet shortfalls. This is the point when farmers will begin to refinance debt.

Schnitkey :33 …of financing those cash shortfalls.

Quote Summary - For example, farmers are now reducing grain inventories and increasing operating notes. Eventually those notes will need to be refinanced. This is when the lender will step in and require collateral on the note, and then term it out. So, that is the process. The working capital is gone, and now we must look at other means to finance cash shortfalls.

Things aren’t dire yet on the farm, however, borrowing to cover cash shortfalls must be stemmed. This will require some fortitude on the part of the farm family. Their annual living expenses will need come down along with the rest of the farm expenses; input costs, cash rents, and the like.