Grain prices are surging and revenue prospects are skyrocketing for corn and soybean farmers who have faced almost a decade of challenging prices. It’s leading to improved cash flow and resulting financial freedom for many growers.
Though such markets can sometimes decrease the focus on financial vigilance and the actions you can take to optimize financing for the benefit of your farm’s balance sheet, it’s actually an ideal time to take a deeper look to ensure you’re setting yourself up for any future dips in revenue potential as grain markets cycle. This includes both short- and long-term financial obligations, their impact on cash flow and your operation’s long-term financial viability.
Restructuring debt essentially spreads financing costs out over a longer period of time, lowering payments as terms are stretched. It also lowers the per-bushel breakeven price. Corn and soybean prices have gained around $2 and $4 per bushel, respectively, in the last year, so selling above your breakevens may not even be a concern. But restructuring debt today may be a way you can improve short-term revenue prospects to generate liquidity further down the road.
Most people in agriculture can tell you what goes up must come down, and though they’re bullish today, high grain prices won’t last forever. Restructuring debt is one way to parlay observations about your farm’s current financial standing into real action that can futureproof your balance sheet. Here are some things to think about if you’re considering restructuring your farm’s debt.
Changing a five-year financing plan to 10 years, for example, will lower each payment, freeing up cash in the short term and lowering the breakeven price. If the overall cost of production was near the breakeven under shorter financing terms, lengthening those terms should lower short-term operating costs and enable producers to lower their breakeven price. On the other hand, shortening financing terms in times of strong markets will help you chip away at principal more quickly. And in theory, higher corn and soybean prices should help make that more achievable.
A disadvantage of extending financing is it increases overall financing costs in the long term. Ensuring an operation’s equity is strong enough to sustain that extended financing is critical to the successful execution of this strategy. When shortening financing terms, you’re paying more in the near term, but you’ll lighten your financial load down the road.
Just as it’s critical to not take on more short-term debt than what’s manageable in the name of freeing up future liquidity, it’s important to not “kick the can down the road,” especially on assets that may not have a long usable life. If lengthening financing terms for a tractor purchase, for instance, it would be important to ensure the bank was not extending the loan beyond the operating life of the machine. Making payments on equipment that is no longer a functional asset swells debt levels and does not set a farm operation up for financial stability.
So, what should I do?
If you’re on the fence about restructuring farm debt to free up cash, start by looking at the expense side of your balance sheet, namely your fixed costs. If extending financing terms will make it difficult to cover those costs over a longer period of time, restructuring debt may not be the best strategy for you. If bullish grain markets have you weighing shorter terms, consider the financial obligations in the near term versus the value of freeing up long-term liquidity.
Restructuring debt is a strategy that can be beneficial in some situations but can also affect an operation’s financial risk and long-term liquidity. It’s a decision that should be made alongside a trusted financial partner who can help you examine all of the variables and determine whether it can work for you.