Do lenders own your farm?

Nov 2, 2012
by DTN

Fewer grain farms are likely to be held hostage by their debt loads should today’s Golden Era end abruptly. Unlike the 1980s, America’s grain producers have bolstered an important equity ratio since 2007 that will help them withstand a return to thinner profits or higher interest rates, a recent study by AgriSolutions found.

After the 1980s debt crisis, financial advisers encouraged farm operators to keep their equity-to-asset ratio above 0.5 at a minimum, AgriSolutions consultant Sam Bachman says, with 0.66 the recommended level.

For the time period between 2007 and 2011, Bachman divided 100 grain farms in the AgriSolutions database into four quartiles, ranked by their asset/debt ratio. The lowest quartile grew its score from 0.45 to 0.52, so they still have room for improvement, Bachman says. The Brighton, IL, firm’s customer base spans 13 states and represents all size farms, from part-timers to 10,000-acre operations.

“The equity-to-asset ratio is a measure of who really owns the farm, the bank or the farmer,” Bachman says. “So at 0.66, you own two thirds of your operation and the bank owns a third. It’s one benchmark you should watch over time to make sure you’re making progress in your operation.

“Commodity prices have been shaken up so much since 2006 that farmers are making real money, not just eking out a living,” Bachman said. “You can’t fix a low equity position overnight, but this shows you can work on it over a lifetime.”

All quartiles in this sample registered steady progress since 2007. The median group grew their equity from 0.62 to 0.72 during this same period, adding about $250,000 to their net worths, Bachman said.

Growers in the top quartile have amassed a war chest of assets, owning about 0.89 of their operations in 2011, up from 0.83 in 2007.

While some operators aspire to retire their mortgages, the debt-averse may be growing slower than their peers because they aren’t leveraging assets, Bachman noted. With 20-year farm mortgage rates hovering near 4.5 percent—down from 8.55 percent as recently as 2008—it may not make sense to be totally debt free.

Ultra-conservative operators may be missing a rare opportunity to grow their businesses with borrowed capital, he added. They have the most capacity to take on new rental ground or invest in items such as irrigation or drainage that will increase their overall profitability without endangering their credit worthiness.

Read and comment on all past DTN Ag Business Benchmarks on the Minding Ag’s Business blog. — Marcia Taylor, DTN