Managing Debt in Lean Years

Peter Callan, Extension Agent, Farm Business Management, Northern District

As a former dairyman and agricultural lender, I have sat on both sides of the table when a producer is faced with low milk prices and/or drought conditions. This has been the story during the spring and summer of 2016 with depressed milk and grain prices.  Many producers have been unable to pay their farm’s operating expenses and loan payments on a timely basis. Speaking from experience, this should not deter producers from communicating with their lenders.  Agricultural lenders understand that agriculture is a cyclical business. They realize that current milk and grain prices are below the breakeven costs for many producers. It is during these times that communication between lender and producer is most critical.

Lenders are a necessary part of any farm business and maintaining an open line of communication between lender and producer is crucial   When a producer is unable to meet their monthly expenses and accounts payable start to increase, they should contact their lender immediately.  Lenders get gray hair when they receive phone calls from frantic borrowers stating they have been on a cash only basis with their feed company for several months.  At times, I’ve had borrowers even request that a loan application be processed ASAP because they need feed in two days and there are not sufficient funds in their checking account to pay.  My advice to avoid these situations is for producers to always monitor cash flow and notify their lender as shortages develop. This will give lenders and producers time to plan and develop strategies, like new lines-of-credit or loan restructuring, to pay monthly operating expenses and loan obligations before there is a crisis.

Providing lenders with historical financial and production data proves vital when seeking assistance during economic downturns. In accordance with today’s regulations, lenders require borrowers to provide updated balance sheets, cash flow statements and production information to be analyzed in support of loans. Usually three years of financial information (e.g. income tax returns) are used to evaluate a loan application. However, a loan applicant’s ability to provide five years of financial and production records may strengthen a loan application as it lets producers prove that their farm has the repayment capacity for restructuring farm debt. Prior to meeting their loan officer, a producer should complete updated financial and production records, including balance sheet, year-to-date cash flow, and projections of income and expenses for the remained of the year. This will make best use of everyone’s time shifting the focus from data collection to solving the problem at hand.

After addressing the short run issues, the focus should turn to longer term management strategies.  My suggestion is for producers to schedule visits with their lenders two or three times per year. Visit in late January or early February, to go over an updated balance sheet and cash flow budget for the year. Prior to the visit, producers should develop budgets for crop inputs using current prices for herbicides, seed and fertilizer using current soil tests to calculate pounds of fertilizer that will be purchased during the year.  Dairy farmers using DHIA records and December statements from milk companies, can calculate actual pounds of milk sold/cow/year and culling rate.  Using projected grain, cattle and milk prices (e.g. futures market), producers can develop an annual farm budget. This farm budget will provide insights into potential cash flow deficits that may occur in the future, which will allow loan officers to develop financial options, e.g. new lines of credit or restructured loans, etc., to alleviate possible cash flow shortfalls later in the year.

I encourage producers to invite their lenders for a farm visit during the summer to explain successes, challenges, and most importantly, how the challenges and problems are being addressed. I suggest that dairy farmers walk through the barn with the loan officer and show them that the milking herd, heifers and calves are being well cared for. Lenders are trained to appraise the value of the dairy cattle and the dairy herd serves as collateral for agricultural loans! Crop farmers should discuss plans for marketing their crops and the use of price risk management tools.  Farm visits can show loan officers that producers are operating their businesses in the most cost effective manner and that the bank’s collateral is being well maintained. Remember, it is in the lender’s best interest for the producers to remain in business and continue making payments on their loans.

After the tour, the producer can present a year to date summary of income and expenses to discuss the to-date figures with the projected annual budget. Discuss strategies to improve farm profits along with accounts payable, future credit needs and equipment purchases as well. Also discuss plans for capital replacement of machinery, equipment and structures. If the producer is unable to postpone the replacement of worn out machinery despite limited cash flow, they should also discuss the trade-offs between repair bills and increased downtime, and loan payments for new capital investments.

Farm visits and providing financial information to lenders on a timely basis helps lenders make informed decisions that can impact the long term farm viability. By working together, producers and loan officers can develop strategies to insure farm survival in an era of depressed commodity prices.

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