How to make smart credit decisions in 2015

We asked three experts to offer their views on farm financing in 2015. Farmers are increasing their dependence on merchants and equipment dealers for credit, and our experts reflect that trend.

What farm financing trends do you see coming?
Gerke: MFA Incorporated’s lending arm, Agmo, is financing the same number of farmers as last year. Our real growth is in seed financing. Seed costs have risen, and we’re working work with John Deere Financial to offer new ways to finance seed. Last year we increased seed financing and expect growth this year with the help of John Deere Financial.
Murray: In recent years, crop input merchants like MFA have experienced near record levels of prepayments from growers to accommodate input expenses for next year’s crop needs. USDA predicts reduced farmer cash inflows in 2015, causing growers to seek alternative sources of cash flow. Growers are increasingly benefiting from programs that allow you to take advantage of incentives offered by MFA and other manufacturers of seed, crop protection and crop nutrition products. You can often borrow at zero percent interest or other attractive rates. You can lock in early-order incentives and pay the balance later, after you complete harvest and crop sales. This lowers your interest cost and can improve your liquidity, working capital and cash flow.

What do you project for farm debt?
Boehlje: A lot of farmers have paid down their debt and debt levels are low. We don’t have the same debt problems we saw in the 1980s. There’s not a lot of highly leveraged land, so there aren’t a lot of mortgage problems. Farm debt levels are at 10 to 11 percent now overall. But this could give you a false impression—if you don’t have enough cash to be resilient, there’s no way to rebuild your business.
Murray: Many farmers’ balance sheets reflect favorable asset valuations, working capital and equity. However, asset valuations have largely been due to increasing land values driven by record high farm commodity prices. Values of farmland and other farm assets could be adversely impacted if low commodity prices persist.

Will interest rates go up?
Boehlje: Interest rates are upticking a bit, but they’re still low. For a long time, we’ve been saying that rates have to go up. They’re just not going up as fast as we thought they would. The European Union may be going into another recession. With U.S. exports softening, how long can we sustain our recovery? The more uncertainty we face, it’s more likely that the Federal Reserve will keep rates low. We won’t see runaway interest rates.
Gerke: I do not see interest rates going up until at least mid-2015, and more likely not until 2016.
If you were a farmer, what would you do to manage debt in 2015?
Gerke: I would keep close track of net income. About 20 percent of farmers with high debt and/or lower income per acre will have trouble maintaining positive net income.
Murray: Ultimately, cash flow and liquidity pay and service debt. It’s critical that growers take advantage of the lowest-rate financing options while preserving working capital and liquidity.
Boehlje: The biggest determinant in loan repayment ability is the size of the payment, not the interest rate. If you bought farmland using a loan with a ten-year maturity, consider refinancing for 20 years to benefit from lower payments. Equipment payoff schedules of three to five years may be too short. Don’t wait until you can’t make the payment. Talk to your lender now—you may not be in a position to attract capital later. Loan officers feel more pressure, and credit analysts and risk officers play more important roles in today’s lending decisions.

SEE RELATED OUTLOOK STORY HERE "2015 AG OUTLOOK"

Expert Bios:

Jerome Gerke is corporate credit manager of MFA Incorporated in Columbia, Mo. His team provides short-term revolving lines of credit to  farmers in Missouri and surrounding states. In addition, in MFA’s fiscal year ending Aug. 31, 2014, MFA provided $59 million to 1,600 operators through an intermediate-term loan program offered through its Agmo subsidiary.

Kevin Murray is an account manager with John Deere Financial of Johnston, Iowa. John Deere Financial is one of the largest providers of financial services to agriculture and construction, supporting John Deere around the world with more than 1.7 million accounts and a portfolio of nearly $37 billion. In addition to financing equipment, the company also offers revolving loans and crop input financing.

Michael Boehlje is professor of economics at Purdue Univeristy. Purdue University in West Lafayette, Ind., has long hosted one of the nation’s leading agricultural colleges, and Purdue’s Michael Boehlje is a highly respected professor of agricultural economics. We asked him to forecast what he sees for farmers in 2015, and how to build enough financial resilience to stay in the black. SEE RELATED OUTLOOK STORY HERE "2015 AG OUTLOOK" which quotes Dr. Boehlje.