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Farmers Face Challenges with Lenders

October 27, 2012
By: Ed Clark, Top Producer Business and Issues Editor
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The focus for Les Anderson of Cannon Falls, Minn., is to develop as much liquidity as possible, while grain and oilseed prices are posting record highs.  

Farmers face plenty of credit, tight standards and increased need for communication

Lenders are just as crucial to a farmer’s success as cooperative weather, agronomic know-how and savvy marketing. But it’s still important that farmers—not their bankers—ultimately make the operation’s business calls. Les Anderson learned that the hard way. In 1986, the Minnesota producer had the oppor-tunity to buy farmland for just $800 per acre. Even with a significant down payment in hand, his lender said no.

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"Lenders were taking huge write-downs on land and were scared to make farmland loans," says Anderson, who grows corn and soybeans. "He encouraged me to expand my hog operation instead of land."

Despite the fact that farm credit was tight in the 1980s, Anderson believes that if he had gone with his gut instinct and found a lender who would work with him to buy the land, it would have been a smart move. The experience taught him several lessons. First, he’s the one who has to make expansion decisions. Second, there is more than one lender out there. Eventually, Anderson found a great lender who he’s been with ever since. Third, while credit is plentiful today and everyone wants a piece of agriculture, once farm prices crash again, creditors might again flee the industry.

In light of the drought, you need to be up front with your banker and share how you plan to get through the next few months. Furthermore, you need to give your lender advance warning on what your credit needs might be. Doing so creates far more options than approaching your banker late in the game, whether you’re looking for farm inputs to book for 2013 ISSUESor the next load of feed. For as many as 20% of producers, the reality of 2012 hasn’t yet sunk in, but it needs to and soon, lenders say.

One of the benefits of providing lenders cash flow, balance sheet and liquidity information before the fact is that if a great land or machinery deal comes your way, your banker has the information he or she needs to make a rapid-fire decision and get you the money to close the deal.

Relationship rewards. For Ethan, S.D., producer Shannon Klumb, having a close relationship with his banker paid dividends this year. "I consider our banker to be a partner—on our board of advisers just like our nutritionist," he says.

After suffering a total loss of their corn crop, Klumb; his father, Larry; and brother Ben had to borrow additional funds to keep their livestock operation afloat.

"The least we’ve paid for corn is $7.10 per bushel," says Klumb, who’s had to purchase 200,000 bu. of corn so far. "At the moment, we’re showing a $20 to $30 head loss on hogs.

"The cattle side should be great, however. If you have a diverse farm operation like we do, you can offset," Klumb adds.

To manage this year smartly with a higher level of borrowed funds, the Klumbs worked out a deal with their banker to convert as much operating debt as possible to term debt. This keeps them from maxing out their operating line in case interest rates go up and gives them the most flexibility moving forward.

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FEATURED IN: Farm Journal - November 2012

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