Case Study: Denial Lessons
- Grant Wiese
- Jun 23
- 2 min read
SW Financial Literacy
Case Study: Denial Lessons
Today we have a new farm buying case study to review.
Background:
Mike farms 1,100 acres of highly productive irrigated crop ground and does not have anyone coming back to take over the operation. 480 of those acres are owned with the rest being rented from mostly stable, long-time landlords. He is very involved with the community and is a big sponsor of agricultural organizations. Mike has a strong reputation financially in the area.
Situation:
Mike is needing to buy out 160a from his cousin who has been his long-time landlord. With farming 1,100, he doesn’t feel he can afford to lose any acres at this point in his career. Asking price is $10,000/a for the 160a irrigated with pivot included in the purchase.
The Deal:
Mike would like to make a $300,000 down payment and finance $1,300,000 of the purchase price on a 20-year term. With 5-year interest rates at 7.15%, payments would be $125,000/year. The ground had been rented at $345/a for a total of $55,200. To finance with this structure, payments to farm this ground would increase by $70,000 before $10,000 in property taxes. This is the equivalent of paying $843.75/a in cash rent to own the farm.
The Reality:
Operation has -$200,000 working capital with a current ratio of 0.62:1. Balance sheet was put together in January with 80k bu unpriced grain valued at $4.85/bu and was most likely overstating their working capital position. 2 8R tractors are on the balance sheet with loan payments against both. There is a working capital injection loan on the balance sheet of $250,000 to be paid back over the course of 7 years. There are $375k in debt payments to make each year against an average gross income of $1.6M. Term demand payments against GFI stands at 23% if this new purchase was completed.
Outcome:
Loan denied. This operation is drowning in debt and has eaten up all their working capital. The cash injection loan was poorly done and didn’t achieve anything as the operation still doesn’t have enough cash to be liquid and they increased their debt payments. Net worth losses have occurred each of the past 3 years and cash flow is deep in the red with this new loan proposal.
Moving Forward:
The operation should let this property go and downsize equipment. With no-one coming back to the operation and a smaller land base, they are making way too many equipment payments to have any chance of profitability. Their land debt payments are fairly low on their balance sheet and there is good equity in their land base. If they can get term expenses in line, they should be able to survive with the equity on hand if they can become liquid again.
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Have a great week!
Grant
