Things to consider when seeking a loan for a farming operation
Ever wonder what your banker thinks about your operation? Or their view on the current state of the industry? We talked with our team of agribusiness bankers and here’s what trends and topics are on their minds.
We hear this one often: “Are banks lending money in ag right now?”
Yes, there are banks still lending in the ag sector right now. However, as some banks struggle with their ag portfolios or small banks stop lending, those top-tier ag customers may have to start looking elsewhere for their financial needs.
While credit should continue to be available to most producers, you should expect more discussion about cash-flow adequacy. Lenders will focus on the balance between input costs, production yields and grain prices, along with the potential for operational losses, especially with less efficient producers. Farmers should forego unnecessary expenses and capital purchases unless they are sure cash flows will cover land and equipment payments as well as unforeseen expenses.
Yes, It’s Still True – Cash is King
Working capital and liquidity have become – and will continue to be – critically important in the coming years. One of the major factors we saw in the 1980s farm crisis was the issue of liquidity. Farmers and ranchers didn’t have enough liquidity to make it through the down cycle. And while having liquidity is not necessarily the “farmer way” because of their propensity to buy land, equipment and fill the bins, it is important to have cash available during challenging times.
This can be achieved with having the right bank and banker support, as well as the right structure and credit products available. The goal for many will be to survive the current grain price levels and get ready for improved prices in 2018 and beyond.
Marketing: Know Your Price Points and When to Sell
Be prepared to react quickly to changing market conditions as they occur in relation to the growing conditions in your area. This means having already set up the appropriate accounts and mechanisms to forward sell or hedge commodities in volumes relevant to anticipated total yields and being prepared to execute these forward positions quickly and systematically as pricing opportunities arise.
A consistent, well thought-out marketing program – capable of being executed on a timely basis, both before and throughout the growing season – is just as essential as excellent farming practices and robust crop production to annual financial performance. This practice, combined with adequate crop insurance, can provide the risk abatement mechanisms required to protect farm families and their operations in troubled years and achieve consistent profitability for the long run.
What’s the Deal with Interest Rates?
With the historically low interest rates we’ve experienced for almost the last decade, many ag producers were lulled into forgetting that interest rates can change as fast and dramatically as corn prices. As the economy has improved, the Federal Reserve Bank has begun to raise rates setting the stage for a return to a “normal” interest scenario during the next couple of years.
As this process continues, producers with large floating rate exposure can expect to see their interest expense double or even triple during that time frame. While the interest rate curve is very flat at the moment, the spread between fixed and floating rates may also expand in the years ahead, regaining its historical gap. When that happens, borrowers with purely floating rates will be at the mercy of the financial markets in terms of controlling their interest expense. By fixing rates now, with proper use of fixed assets as collateral, and carefully forecasting future operational cash flows, producers can effectively lock in today’s rates, potentially saving themselves tens of thousands of dollars or more in interest expense, and be far better prepared to effectively manage other variables that may come into play.
Are We Compatible?
The ideal relationship between a farmer and a banker is based on honesty and transparency. Trust is a two-way street. Your banker must trust you as a farmer with the money he is lending you. And in turn, you must trust the banker, knowing that the more you disclose, the better your banker will understand your operations and can structure credits and put facilities in place to meet your needs. The willingness to communicate – both in good times and bad – is crucial to a successful relationship.
The Next Generation: Lessons for Young Farmers
We always say that younger farmers and ranchers need to take the long view. Agriculture is a cyclical business that will have ups and downs. This means avoiding the “recency bias,” which is the inclination to use our most recent experience as a baseline for what will happen in the future. Young farmers and producers have seen only a limited portion of what can happen in a cyclical business.
Be a student of the market, industry policies and history. Things can happen in the future that we couldn’t even imagine today. Being a student of the agriculture industry and its history will have you more prepared for the inevitable “black swan” that will appear sometime during your career.
Remember that family is always first. Working alongside family is both a privilege and a challenge. Value your relationships over profits and treat people as family first and partners second.
Bill Watson is president of UMB Bank’s Agribusiness Division.