Grain Farmers Cope with Cash Crunch

With several years of low prices, grain farmers are struggling with cash flow. ( JoAnn Alumbaugh )

Even though farm income has halted its rapid decline, 2018 looks to be another year of tight profit margins. USDA forecasts net farm income, a broad measure of profits, will decline nearly 7% from 2017 to just under $60 billion for this year. This would be its lowest in nominal terms since 2006. Net cash income is forecast to decline 5% to $91.9 billion—its lowest since 2009.

Farmers’ working capital is forecast at $56.2 billion in 2018, a 16% drop from 2017, and a result of declines in farm income and current assets coupled with an increase in debt.

cash crunch visual
© Source: USDA, ERS

Meanwhile, farm debt is forecast to increase by 1% to $388.9 billion this year. That is led by an expected 1.2% jump in real-estate debt. The debt-to-asset and debt-to-equity ratios are about even with a year ago and well under the 1970 and 1980 levels.

Farmers’ debt load is the silver lining to this bearish snapshot of farm finances. “USDA’s figures indicate farmers, while stressed, are keeping debt levels relatively under control,” says Mike Walsten, consultant and columnist for LandOwner, a sister publication of Farm Journal.

Debt levels soared in the late 1970s and early 1980s, which triggered a rush to liquidate farmland to pay off debt by lenders who were facing their own financial woes, Walsten explains.

“Today, lenders are in generally healthy financial condition and were cautious about saddling customers with high debt loads during the surge in farm incomes,” Walsten says. “This puts lenders in position to work with cash-strapped farmers rather than rush to liquidate farm assets and land.”

While some farmers have had to partially or entirely liquidate farm assets, most were cautious about adding new debt during the commodity-price explosion, Walsten says.

“We may see some asset liquidation in 2018 or 2019,” he says. “Talk of sell-leaseback farmland sales has been more common this winter, for example. But currently there does not appear a flood of farmland will head to the market this year.”

Another positive indicator is the debt-to-income ratio is still restrained at 6.5:1. “This ratio is a reliable early indicator of a potential collapse in farmland values,” Walsten says. “It is well in the caution zone, which starts at 6:1, but it’s not soaring into the danger zone.”

When the ratio rose above 6:1 in the 1970s, it continued to rise and the ag recession of the 1980s was inevitable.

“Today’s ratio shows farmers, lenders and the industry have time to work through the collapse in farm incomes,” Walsten says. “It also keeps us confident the market is merely undergoing a manageable correction in a long-term bull market.”