Joe Peiffer on the Big Show – Cash Flows
DC: There was some concern going into this year’s planting season that some farmers may have some cash flow issues with their bankers. Joe Peiffer is a bankruptcy lawyer with Ag & Business Legal Strategies out of Cedar Rapids. Did we make it through the planting season okay, Joe, or are there still some issues that need to be dealt with?
JP: I don’t think we’re through a tough period. I still have several clients who have not lined up financing for this year’s crop, which is the latest I’ve ever had people contacting me saying they don’t have this year’s crop financing lined up, or they’ve made the decision to let the land go so somebody else can rent it. That’s a shock to me. I’m hearing from banks that there’s a good bit of stress out there. The banks are saying well, it’s not as bad as it was in the 80s because you can sell a farm or do something else and pay down your debt. That’s true – you can do that because the land values have been remarkably stable the last few years despite the pressure we’ve got from the low commodity prices. Investors have still been out there, but we’ve seen the Fed knock interest rates up a quarter point twice this year. They’re talking about doing it at least one more time, if not more than that. We’re also looking at inflation starting to tip up. Inflation is now at about 2.5%. You look at the interest on the 10-year treasury bond, that’s about 3%. That means that the real return for those investors above the rate of inflation is .5%. I expect that that’s going to be changing and that those rates are going to go up. If they go up, the viability of highly leveraged borrowers will go down because they’re borrowing a lot of money. Their interest is going to go up. Most times, interest is – many times it’s variable, and if it’s fixed on land, you might get it fixed for 3 or 5 years if you’re with a local bank. If you’re with a land bank or an insurance company you can get it fixed much longer than that, but local banks don’t like to fix them very long. And we’ve seen a lot of our farm clients in here that have virtually all of their loans annually renewable, which is a concern. If you – an operating loan is fine. If you borrow money, you should pay it back at the end of the year. But the loan that you don’t realistically expect to be able to repay, if it’s annually renewable or renewable every 3 years, every time it’s renewable, if you can’t pay it in full, the bank can decide they don’t want to extend a loan, and then can, in essence, call the loan and now if you can’t get refi’d, you’re really in a tough spot. The cash flows, some of the crop numbers, are looking a little better as far as the prices and there have been marketing opportunities, but it’s still a very tight cash flow. People are going to need to be sharpening their pencils. Frankly, I expect that they should be, you know, once we get the crop in and get spraying done, probably in June we ought to be starting to look – to plan ahead and look at our cash flows again and see where they’re at because at least on rented ground, you get until September 1 to notify the landlord whether you’re going to want to rent it next year or not. Otherwise, it automatically will renew for another year at the same terms. Both landlords and tenants have the option to give notice the lease is going to be up after this crop year, but they have to do it by September 1 in Iowa, and if you don’t give it, it automatically extends. Well, if it looks like you’re losing money on a farm, why are you renting it? And I look at it as a business decision – it’s got to make money for you, or why are you doing it? The people are going to have to keep their pencils really sharp. They’re going to have to look at if the increased standard of living when the price of grain was high. Now they need to be looking at perhaps a decrease in family living. A number of people I’ve seen have gone out and bought nice recreational vehicles, boats, campers, and other things, and they bought them on borrowed money. They didn’t pay cash for them, it was bottom of the barrel money, and now they’ve got payments to make. How do you make your payment when the farm’s losing money? You see your net worth drop if that occurs, so then the question is, how do I get out of the situation I may have gotten into? You need to look at a lot of belt tightening or maybe people get additional off-farm work to support things until things turn around. But if people are losing money on every acre they’re farming, then the question is, why am I farming so much?
DC: Joe, what’s your best advice? What should farmers be doing if they even suspect they could be heading for some trouble?
JP: You need to get in, you need to take the bull by the horns, you have to address it and move forward. If you’re not doing that, you may say it’s faith, but frankly, it’s not so much faith as it is poor planning. Let’s make some planning, let’s make some business decisions, which is why I’m suggesting running cash flows and realistic cash flows. Staring in – you get this year’s crop ready to rock and roll as far as getting spraying done, start working again on next year’s planning. Where do you think you’re going to be? Are you able to make money? And I look at it on a farm-by-farm basis and a crop-by-crop basis. It’s important to do that, otherwise you’re losing money and not realize it. Let’s sharpen those pencils and make tough economic decisions that have to be made. If we don’t decide, others will decide for us, and unfortunately, it’s typically your lender that’s deciding for you. And the lenders’ motivation when they’re deciding for you is to collect their loan, not to keep you necessarily in business long term. Once they’ve decided they’re not going to finance you, they have a one-word vocabulary – liquidate – to collect their loan. A lot of that can be avoided if there’s good planning done and action is taken to stem losses and find other sources of income.
DC: Joe Peiffer is a Cedar Rapids lawyer with Ag & Business Legal Strategies. I’m Doug Cooper on the Big Show.