Gray-Haired Banker Advice

October 19, 2018 04:00 AM

“Don’t tell me what you value, show me your budget,” says Curt Covington, executive vice president and chief credit officer with Farmer Mac. “If you show me your budget, I’ll tell you what you value.” 

This frank and realistic view from Covington is a great passage to ponder as you close the book on 2018. What challenges and opportunities will you discover in the years ahead? How can you best be prepared?

“Farmers need to think strategically about financial decisions,” Covington says. “That allows you to remain nimble in a volatile business.”

Covington, a 40-year agricultural banking veteran, provides three lessons today’s farmers should abide.

Lesson 1: Leverage kills.

“High commodity prices, strong land values and low interest rates cover a multitude of sins,” he says. “Every farmer appears bankable in that environment. It was true in decades past, and it was true just a few short years ago. Debt payments are fixed costs that don’t care where commodity prices are. Debt piled up in the good times still needs to be paid in the bad times.”

What’s the right leverage number? “There isn’t one, unless you make crippling decisions in your business, and then you’ll see exactly where it should have been,” he adds. “Understand that if you see that number going up, you are adding financial risk to the business.”

Lesson 2: Time does not fix the problem, action fixes the problem.

Not long ago, Covington says, he heard a young farmer say, “I’m farming next year, but I’m not sure that my banker is.”

“That’s troublesome thinking,” Covington says. “Ag lenders sometimes think, ‘If you’ve got dirt, you can’t get hurt.’ That is misplaced optimism and, oh by the way, yes you can.”

Lesson 3: Taxes are a form of debt and deferring them has consequences.

“Deferring crop revenue is a tax gift that keeps on giving—that is, until the income train comes to an abrupt halt,” he says. “Unfortunately, the tax man wants his money when the farmer doesn’t have it. The problem gets compounded with capital gains tax when the farmer attempts to right-size his or her balance sheet by selling long-held land assets.”

Path Forward. For your farm business to thrive today, you need to employ three keys to cash flow freedom, Covington says. Commit to short-term planning. Know your cost structure. Control your cost structure.

We’ve outlined several best management practices for you to improve your farm’s financial health in this issue. Check out pages 20 to 28. Good luck in the year ahead. Stay focused on your goals and business values.

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Spell Check

Fred T
Central, NE
10/19/2018 08:51 AM

  Coming from net worth lending to cash flow lending. Pendulum swings again. Interest rates will creep back up causing a collapse in land prices. And, unless you have super deep pockets, that $10,000 per acre farm that was purchased recently, will haunt you until retirement. Too many farmers put a budget together for their lender, then don't look at it again until it's time to visit their lender wondering why the year isn't working. The crisis of the 1980' s is rearing its ugly head again. Trade war or embargoes. What's the difference to us right now?

old ag banker
10/19/2018 04:24 PM

  There is a reckoning coming. The Ag Lending world has been in Extend and Pretend for the last 4-5 years. Working capital is gone. Land is leveraged up to payments that exceed $500/ac Farm Credit doesn't look at earnings with their automated approval systems. I was there when Farm Credit realized that they were in trouble in the early 80's when the elephant in the room changes direction look out. The best advice the article had was Time doesn't fix the problem Action fixes the problem. IE your not going to earn your way out of this, its time to start looking at asset sales and surviving with a smaller footprint.


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