4 Ways to Preserve Farm Equity

By | Bank Iowa March 14, 2019

4 Ways to Preserve Farm Equity

 

It’s been another difficult year for row crop farmers. They continue to face market prices that strain revenue potential, tighten margins and make financial planning for the future a difficult task.

 

And, just like with Mother Nature, no farmer can control the markets. But, we can control a few variables that help preserve farm equity and make ends meet until the corn and soybean markets see a return to prosperous levels.

 

In the January 2019 edition of the Kansas City Federal Reserve Ag Finance Databook, economists indicated the volume of non-real estate lending rose for the seventh consecutive quarter. The increase in non-land financing was especially sharp in operating financing, in which lenders saw a double-digit increase. The numbers highlight the trend of increased borrowing among farmers, largely for operating expenses.

 

The good news is many farmers have maintained a strong enough financial position to manage the debt. The bad news is the number of farmers in that sustainable financial position is likely declining. All in all, however, there are reason to remain optimistic.

 

“Alongside persistently low agricultural commodity prices, bankers throughout the country expected farm income to decline in the coming months,” according to Federal Reserve Omaha Branch Executive and Vice President Nathan Kauffman in the latest KC Fed report. “Despite the ongoing weaknesses in farm income and agricultural credit conditions, however, delinquency rates on farm loans remained low and the performance of agricultural banks remained sound.”

 

If you’re running up against an increasingly stressful financial situation on your farm, there are variables you can control that help retain equity.

 

Perform a self exam

University of Illinois Extension Ag Economist Gary Schnitkey recently suggested in a university report* that farmers perform a self-examination of their balance sheet. Though he admits this activity alone will not move returns from the red to the black, it will open eyes to opportunities and trouble spots.

 

“Actively conserving cash from 2018 operations while cutting capital investments and other costs where possible seems prudent,” Schnitkey wrote. “Consider all possible options for lowering cash rents and moving to variable cash rents.”

 

Restructuring farm assets through refinancing or selling assets, like farm land, are common ways to free up cash to cover operating capital needs. That degree of change may be necessary to secure your operation’s financial future. However, if you’re not quite to that point, there are other ways to cover short-term financing needs for long-term viability.

 

Build income

Finding new ways to generate income is a good way to increase equity, be it through increasing gross income or keeping a lid on expenses, Schnitkey said. Are there new or different income streams you can create for your operation? Or, are there new ways to cut expenses in an effort to make your income go further?

 

Control living expenses

Sticking closely to a family budget is difficult for many farmers because income is often  variable. “It is easy to get into the habit of spending what you make,” Schnitkey said. “If you follow this approach, you will never have money available for equity investment. Even if you increase income, you will simply spend more.” Schnitkey recommends creating a “living budget” and being ready to make adjustments to keep income on the positive side and to avoid letting expenses mount into debt.

 

Grow equity off the farm

Many farm families depend on at least one off-farm job to provide health insurance and benefits that otherwise would carry a massive price tag. There are alternative ways to buoy overall farm equity, namely through investments. If you have considerable investments in a retirement account, stocks, property or other assets, returns on these investments can offset overall equity erosion.

 

“The returns from these investments can be invested in the farm business,” Schnitkey said. “In making this decision, the rates of return and level of risk of these investments need to be compared to those from investing in the farm business.”

 

What’s the best option – or set of options – for you and your operation? Stop by your nearest Bank Iowa location to visit with one of our agricultural loan officers to find out how you can best preserve and grow your farm’s equity, even when times are tight.

 

* Schnitkey, G. and K. Swanson. “2019 Crop Budgets Suggest Dismal Corn and Soybean Returns.” farmdoc daily (8):173, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, September 18, 2018.

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