Jim Knuth is a Farm Credit Services of America (FCSAmerica) senior vice president, leading lending in Iowa, where the financial cooperative serves more than 21,000 farmers and ranchers. He draws on four decades in agricultural lending and current market trends to outline what producers need to focus on in a changing economic environment.
Interest rates are top of mind when producers talk with their lenders, so Jim Knuth starts every conversation by level setting expectations.
“Interest rates are back to normal,” Knuth said. The low and ultralow rates of recent years were the anomaly. Today’s rates, he said, are more historically typical.
While nobody can predict the market factors that shape rates, FCSAmerica expects the Federal Reserve to keep its prime rate between 6% and 8% for the foreseeable future. The prime rate is currently on the upper end of that range, so producers might see some downward movement, but nothing that would allow them to use refinancing as an easy fix for cost-structure problems, Knuth said.
Most producers with long-term debt took advantage of historically low interest rates. This, combined with back-to-back years of record profitability, means farmers are in a good financial position as they enter a new cycle of lower grain prices and tighter margins.
“The issue is with new purchases, new farms, new machinery and equipment, and understanding what payments and total debt structure will look like going forward,” he said.
Every downturn presents opportunities, and those who manage their working capital well will be the ones who grow and expand their operations, Knuth said. Some producers began making changes a year ago, knowing they would need every bit of their working capital. He said, “Our most successful customers make proactive adjustments, mostly based on cost and marketing practices.”
Working capital watchouts
When weighing the benefits of an operational investment against decreased working capital, Knuth suggested producers ask themselves:
- Can I afford a down payment that gets my debt to a sustainable level?
- Does that leave me with adequate working capital for the size, scope and risk of my operation?
“None of us know how tough, how deep or how long this cycle is going to last,” Knuth said. Farmers short-term, risk-bearing ability will be critical to their staying power.
“The good news is we have record levels of working capital going into this cycle. However, working capital management will be one of the most important things producers will need to do.”
Producers know how to manage a down cycle, Knuth said, and today’s environment might require several adjustments — smaller cuts that add up versus reworking one or two bigger parts of their operation. Whether that is negotiating cash rent with landlords, selling underperforming assets, sharing equipment or finding additional revenue streams, producers at all levels have options.
“While this may not get you all the way back to profitability, it can limit losses,” Knuth said.
A sustainable debt philosophy
Every farm or ranch is different, and what works for your neighbor might not be the right solution for you, Knuth said. This is where your partners and advisors can help.
As a lender, FCSAmerica’s focus is on helping its customer-owners reach their goals, even in a down cycle. If a customer is trying to grow, he said, that new debt needs to cash flow.
“We want to be sure producers can make payments in a sustainable way over time, so their debt structure works for them instead of against them,” Knuth said.
