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The elephant in the room

published: July 15th 2019
by: Kindra Gordon
source: Southern Livestock Special Edition

It’s a difficult time in agriculture right now. Challenging weather, uncertain trade policies and low commodity prices have created a perfect storm across the ag sector. Banks are seeing more farm borrowers fall behind on their payments, and reports of bankruptcies are rising.

While many may want to ignore this downward trend and simply keep working hard at production, financial experts advise the best tactic is for producers to get their financial houses in order, which ultimately allows for making better decisions toward a profitable, successful, and sustainable operation.


Candid Conversation

What specific advice do lenders have for ag producers, particularly those whose farm balance sheet is stressed? I recently had the opportunity to listen in on a closed-door session among lenders and financial experts talking candidly about the escalating financial situation facing the ag sector. There were several common themes they suggested to producers in order to ensure financial stability or recovery, depending on the situation.

1.     Make record keeping a priority. One lender noted, “Producers need to work as hard at this component of their operation as they do the production side.” Another said, “Those producers who have financial records are often within the top one-third of profitable producers.”

Thus, financial records offer the producer power – in black and white – to evaluate, assess and make changes to effectively avert financial distress. These lenders agreed that investing in a financial software program or a person to provide bookkeeping services and analysis is well worth the money.

2.     Become a numbers nerd. Imagine for a moment that a salesman is at your door. But every time you ask him a question about the product he is selling, he says “I don’t know” or “I’ll have to get back to you about that.” These lenders liken that scenario to many of the producers who come into their offices and don’t know their numbers. As a result, lenders say they begin to lose confidence in that producer’s ability to make their loan payments and stay in business long term. “We want a producer to know everything possible about their operation and the product or service they provide – and that goes way beyond bushels per acre, weaning weights and average daily gain at the feedlot,” expressed one lender. Rather, they want producers to know debt per cow, debt per acre, what it costs to feed a cow for a year, how much feed you need available, how much of that will be raised, how much will be purchased, etc. Tough questions, but these lenders say once a producer knows those numbers, he becomes a much better, more efficient – and more profitable – producer.

3.     Start with these six documents. There are a bevy of spreadsheets and documents that can be created to track financial records, but there are six that most lenders prefer to start with: a balance sheet, cash flow statement, income statement, a budget with breakeven prices for each enterprise in the business (i.e. market cattle, breeding cattle, crops, hay production), a corresponding marketing plan for each of those enterprises, and a family living budget.

Of the cash flow statement, one lender called this “an underutilized tool,” noting it provides a visual look at the whole financial year – when money is coming in and when funds are needed. This individual suggested producers really must look at cash flow to gain insight into operational changes that may be necessary to insure income is timed with when expenses are due.

4.     Invest in your marketing skills. This group of experts felt that marketing is an area many producers are overwhelmed by – and do not have adequate training in. Rather, they see many producers making marketing decisions because of fear, hope or greed. One financial expert expressed that a marketing plan should provide a road map for the sales of producers’ products. It should include how much you expect to produce, the breakeven price for that enterprise, and “need, want and hope target price levels.” Another marketing strategy suggested was incremental selling dates in order to gain a higher average return for the items being sold (crops or cattle). That said, these experts agreed that if marketing is an area in which a producer does not feel confident in their abilities or does not have time to devote to, a marketing advisor should be sought to provide assistance to the operation.

5.     Utilize benchmarks. By definition a benchmark is “a point of reference against which things may be compared.” Sports fans use benchmarks a lot as they compare the stats of one player to others, or to historical averages. The same can be done with cattle, crops and farm financials.

For example, a producer might have a benchmark in their head of what average calf weaning weights are, and each year compare if their calves wean off heavier, lighter or about average. But the power of benchmarks comes in writing those numbers down year after year and then truly tracking and comparing them. With that production data, producers have the ability to make changes to their operation to improve production levels, or they may observe that a change that was implemented isn’t creating the increased production that was expected, advised one lender.

 With regard to financial data, working capital, debt to asset ratio, net farm income, operating expense ratio and repayment capacity measures are all examples of data these lenders say they like to track in order to assess how a farm is trending. Specifically, there are four areas of ratios: Liquidity, Solvency, Profitability and Repayment Capacity. These lenders explain that from different ratios calculated they can assess positive or negative finance trends for the operation and how those ratios compare against industry based standards. (The industry has standards for each ratio, rated as red, yellow or green. Red indicates danger, yellow a concern and green ideal.)

One lender pointed out this process is similar to comparing EPDS to evaluate livestock or crop performance information for corn and soybean hybrids. Because there are some two dozen ratios that could be tracked, one suggestion is to ask lenders which ratios they prefer to benchmark on, which will help pinpoint what information your specific lender will want you to track on your operation.

The bottom line, said one lender, is that knowing various ratios allows a producer to be aware of changes in their financial stability, it allows them to make proactive changes, and it gives their lender more confidence in what they are doing on the operation.

6.     Track family living expense. These lenders noted that those producers who “get upside down” with debt most often are not tracking – or curbing – their family living expense. They shared numbers showing that family living expense on an average farm in the Midwest over the past five to six years has been as high as $87,000, when more realistically it should be between $50,000 and $70,000. Their advice: “Create a family living budget and follow it.”


Additional Advice

·      Evaluate what a shock to your operation would do to your income, expenses or production. Utilize scenario planning to “what if” questions, then brainstorm solutions to those scenarios.

·      Don’t guess. “We understand that record-keeping and tracking financials isn’t what brought most producers to production agriculture, but it is a task that is becoming much more important,” stated one individual. Another made the point, “If a producer doesn’t know what their numbers are, any change they make is simply a guess. And when you are dealing with hundreds of thousands of dollars, especially during times of tight margins, guesses don’t cut it.”

·      Keep communicating with your lender. Regular conversations, asking questions and sharing your documents with your lender is welcomed, said these professionals. “We want to know what your goals are and how your business is doing,” stated one lender of his producer clients. He added. “When a producer’s loan goes up for review, if we know their answers, we can be on their side when it is time to vote on a renewal or not.”

·      Enlist the aid of professionals to improve your bookkeeping and marketing if it is not within your abilities or time constraints. One individual stated, “Recognizing the areas of the operation that need assistance and finding a way to get that assistance is the sign of a good manager.”



Six important documents your lender wants to see


1.     Balance sheet

2.     Cash flow statement

3.     Income statement

4.     A budget with breakeven prices for each enterprise in the business (i.e. market cattle, breeding cattle, crops, hay production)

5.     A corresponding marketing plan for each of those enterprises

6.     Family living budget.


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