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Strengthen your lending relationship

With farm debt and bankruptcies continuing to grow—a trend that will likely persist during 2018—we asked two financial experts from MFA country to explain how declining farm income has affected our region and what producers can do to strengthen their relationships with lenders going forward.

“The tightening farm economy has led to an erosion in the working capital that farmers built in past years,” said Jason Mott, corporate credit manager for MFA Incorporated. “We are seeing higher delinquency rates and lower credit bureau scores. As a result, MFA has been forced to take a closer look at requests for credit than we did a few years ago.”

Kevin Gabbert, vice president of commercial lending for FCS Financial, part of the Farm Credit System, says his organization experienced an increase in problem loans in early 2016 following the 2015 production cycle.

“However, the number of operations feeling financial stress at FCS Financial has leveled off in the past 12 to 18 months,” Gabbert said. “Good yields helped offset lower prices for crop producers. Overall, demand for new capital financing of equipment, buildings and real estate has been more muted over the past two to three years.”

Mott and Gabbert provided these seven suggestions:

1. Improve debt management

Gabbert: Focus on building adequate working capital. This provides a cushion for adversity and positions you to respond to opportunities. Often, producers make purchases that result in a working capital shortfall. Working capital needs vary by enterprise type, but should typically be at least 20 percent of your annual operating income.

Mott: Lenders base decisions on how borrowers meet the “5 Cs” of credit: character, capacity, capital, collateral and conditions. I encourage farmers to assess their financial conditions before making borrowing decisions. Don’t make a long-term decision based on short-term circumstances. Don’t base a 25-year decision to purchase land or a six-year decision to buy a new combine on just last year’s earnings. Use a three- to five-year average of previous years’ income and expenses to formulate cash flow. Maintain a current ratio (current assets divided by current liabilities) of at least 1.25:1—this gives you enough liquid assets to pay short-term obligations. We like to see debt-to-worth (total debt obligations divided by net worth) of no less than 1:1. 

2. Consider supplier financing

Mott: Farmers increasingly seek this type of financing. MFA maintains relationships with lenders who finance inputs, including John Deere Financial, ProPartners Financial and Rabobank. 

3. Keep good records

Mott: Good records are vital to a lender when evaluating credit. Providing more detailed records on the front end leads to fewer questions on the back end and speeds up decisions. 

Gabbert: We are working with customers to improve their financial reporting and have partnered with the University of Missouri Adult Ag Educators to assist producers in generating more complete and accurate financial reports. Records must be up-to-date to be useful in making real-time decisions. The particular app or program is not as important as the commitment to spend the time and effort to generate timely and accurate information.

4. Work with financial experts  

Gabbert: We have seen a rise in the use of financial professionals, and we especially encourage this for customers with complex operations. Tax, accounting and other professionals provide another set of eyes to help identify areas that need attention. With tighter profit margins, improved financial reporting can help you obtain financing.

Mott: Develop a close relationship with an accountant, and don’t be afraid to ask for an opinion before making a large purchase. Many farmers still keep their own records and pay bills, but an accountant usually prepares tax returns and, in some cases, financial statements. Providing income and expense records to the accountant before year-end leads to better tax decisions.

5. Negotiate with landlords

Gabbert: While there has been some moderation in rental rates, it has been limited. We encourage customers to look at each farm individually and understand how it contributes to the entire operation’s profitability. Variable rental-rate plans may help the producer if farm income remains low and give the landlord the opportunity to share profits if prices elevate again.   

6. Communicate frequently with lenders

Mott: Communicate when changes occur to allow for loan modifications or extensions when needed. I am more willing to work with a borrower who communicates with me. There is no such thing as too much communication, especially in stressful financial times.

Gabbert: Keep an open line of communication with your lender regardless of the economic environment. Share periodic financial reports, and updated production, marketing and operating plans.

7. Manage risk

Gabbert: Develop a written risk management plan that includes both price- and date-driven targets to sell a portion of your production. Recently, opportunities to price at profitable levels have been few and far between. A written plan drives the discipline needed to execute a strategy when opportunities occur.

Mott: Knowing a farmer has a commodities contract and crop insurance in place can be valuable when we’re deciding whether to approve a loan request.

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