Access to credit is increasingly important to ag producers managing tighter profit margins. With input costs stubbornly high and grain prices low, working capital is down from its recent record highs. For landowners, leveraging land equity could be the key to unlocking flexible, long-term financing.
“The advantage of credit availability in this environment is getting bigger and bigger because we’re not operating on cash like we were,” said Jim Knuth, a senior vice president for lending. “You can use working capital to make down payments on machinery or land. The question is: Do you still have adequate working capital for the size, risk and scope of your operation?”
For landowners, “lendable equity” can be an important credit tool. Knuth said his financial officers are working with more landowners who are leveraging equity in their ground to lock in five- and 10-year lines of credit.
Benefits of Leveraging Your Land Equity
Farm Credit Services of America generally loans up to 65% of the ground’s appraised value for five-year and up to 50% for 10-year lines of credit.
"Once you put this in place, you have that availability for the five- to 10-year period regardless of where land values go. Doing it now, when land values are at high levels, allows you to access as much or more credit than you would in a different real estate market.
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Both time frames offer the benefit of extended access to credit, with the flexibility of interest only payments. Producers also like the fact that they don’t have to reapply for a line of credit every year.
“This longer horizon means they don’t have to come back and ask for money, which can be important when opportunities present themselves,” he said. “One example of this is a piece of land comes up for sale and you decide to sell a piece of land to buy it. Your five- or 10-year line of credit can bridge that time between sales.”
The duration of the land equity loan, combined with the option to pay only interest, also requires producers to wisely manage their borrowing.
“This is not a place to park debt or carry over debt,” Knuth said. “Use it to purchase equipment, land or to cover operating expenses. Then appropriately pay over time.”
What Type of Ag Loan is Right for You?
If you're a landowner facing tighter margins and want a long-term financing option, our financial officers can help you determine what loan is right for your operation. Talk with a financial officer to:
- Assess your land's current value
- Calculate how much credit you can access
- Create a repayment strategy that fits your operation
