Farming sometimes feels like a marriage vow – it is done “for better, for worse, for richer, for poorer” due to the nature of commodity price cycles. Now that commodity prices are lower, farmers and lenders alike are trying to pinpoint the behavior and practices that keep them in business.
Curt Covington, senior vice president of agricultural finance at Farmer Mac, has spent the past three decades tracking which financial habits are common among successful farmers – and which ones raise concerns. He says the following red flags won’t guarantee a farming operation will fail, but they will cause lenders to worry it is headed in the wrong direction.
1. Farmers who were spendthrifts during good times. When corn was above $7 per bu., a lot of farmers made a lot of money. That’s good news – if the money was spent wisely, Covington says.
“The good news is, a lot of farmers have built up some working capital and liquidity the past few years,” he says. “This is the best test – what did a farmer do during the good times? Leverage kills – it’s not just about profitability, it’s what you did with those profits.”
2. Farmers who still have variable-rate debt. Although the Federal Reserve elected to keep interest rates unchanged in a Sept. 17 announcement, that move stunned many in the market, who now expect interest rates to inch higher starting Q1 of 2016.
Will farmers be able to absorb those higher interest rates on variable-rate debt? Probably – but not without putting a pinch on other areas of the business, Covington says.
“If you have variable-rate debt, it’s time to start fixing those debts,” he says. “It couldn’t be a better time, in my opinion.”
3. Farmers who struggle with controlling costs. A lot of farmers have already gone to landlords to negotiate rent reductions, Covington says. But while that’s a good move, it shouldn’t be the first move, he adds. He suggests farmers should review the top 20% of their vendors on an annual basis.
“Are you challenging those vendors for the best deals?” he asks. “Make sure you’ve really got it down to the lowest price and the best quality match. You have to challenge yourself on the expense portion of your income statement. Expense control is A No. 1.”
4. Farmers who rely more heavily on inventory than cash. Not all assets are created equally, Covington says. For example, stored grain certainly has value, but cash is faster and easier to work with. And for stored grain, farmers may be overestimating the value of what’s in the bin, he says, especially when commodity volatility can quickly shift corn prices.
5. Farmers who don’t communicate. “Constant communication” is a best practice Covington stands by, whether that be communication with vendors, lenders or even others within the farming operation.
“Use your vendors, your banker, even your CPA and attorney,” he says. “They’re servicing hundreds of other farmers in many cases. Ask them about the best practices they’re seeing with other clients.”
Keep communication lines strong among all key farm stakeholders, Covington adds. Like any other problem, a farm conflict is best dealt with sooner rather than later after it has festered or worsened, he says.
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