tractor enterprise financing farming soil money

Extend and pretend

Many customers seek either the refinancing of operating debt, also termed “carryover debt,” on an extended loan structure that is often ten to thirty years.

At a recent producer event, a few agricultural lenders attended seeking insight into the future direction of agriculture. During the two-day event, two lenders separately shared very similar perspectives. In essence, they are both observing an “extend and pretend” type of mentality in their producer customers. 

More specifically, from their observations, many customers seek either the refinancing of operating debt, also termed “carryover debt,” on an extended loan structure that is often ten to thirty years. Other customers are seeking to restructure the whole balance sheet on long-term debt. That is, they want to refinance the short and intermediate term debt, which is normally subject to a five to seven year payback term. These customers are utilizing excess equity in land as a means of negotiation to lower debt service payments and provide some relief in today’s economically challenged environment.

Both lenders commented that some of these customers tend to view the extension of terms as a cure for all the financial ills of the business. Others, knowing that refinancing is not an endless cure, are hoping that restructuring buys them enough time for commodity prices to rebound due to weather or another production event elsewhere in the world. In both situations, customers are pretending instead of making the necessary adjustments in their businesses, which is a cause for concern.   

However, do not discount the importance of refinancing and restructuring options.These are critical tools both for lenders and producers, and high amounts of excess equity particularly in land, is needed for a lender to be secure these options.  True, these tools can result in complacency or a false sense of security for the producer. Yet, instead of security, refinance and restructure options should compel a sense of urgency.  In fact, without an urgent focus (or re-focus), some may make the same request two to five years later. Of course, this results in the deterioration of equity where losses are capitalized through debt. 

To avoid the plight of pretending, I suggest producers consider the following points: 

  • How can one maintain production by reducing cost (fixed and variable)? Sometimes scaling back the operation or doing an enterprise budget can help one think critically about the business.
  • Sometimes a family living budget with specific allocations can be a cure strategy.
  • Others have generated off farm income with outside employment or other businesses.
  • Still others are executing on a marketing plan.
  • Some are weeding out the unproductive labor or activities.

 In spite of the acute observations from the two lenders, the “extend and pretend” strategy will become less and less of an option in the future. Regulators that oversee agricultural lenders fully understand the current economic environment as well as looming risks.  They will likely begin to tighten down on credit, lessening availability and forcing producers to make changes.

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