Manage Your Banker

January 7, 2014 08:28 PM
Manage Your Banker

Some producers get better rates and terms

Two producers have similar operations, but one gets lower interest rates and better terms than the neighbor across the road. It’s all because one has figured out how to manage his lender.

Like all other suppliers, bankers do not treat all customers equally, but by making changes in your lender relationship, you might get better deals.

"If we have high confidence in a producer, they’re going to get better rates and terms," says Joe Kessie, senior vice president of Lake City Bank in Warsaw, Ind. "An ideal client might get a loan at 50 to 100 basis points less than the average loan rate."

A big part of that gets down to producers’ ability to manage their bankers by giving them what they require before needing to be asked. That means convincing the lender that you are a low-risk investment. Producers getting the best deals are the ones with quality financial information who can communicate it.

"It’s more than saying you want x percentage of corn sold at $6 per bushel. That tells me nothing about profits."

"That means having an accurate balance sheet and income statement," explains Nate Franzen, First Dakota National Bank, Agri-Business Division president. While semi-annual reports are sufficient for some farms, quarterly and even monthly reports can help put lender concerns to rest for highly leveraged farms or larger operations with complex enterprises, Franzen says.

It all starts with having and implementing a written business plan and sharing your progress, adds Chad Gent, Farm Credit Services of America vice president. Bankers also like to see your operation.

Show the Farm. "We like to meet producers in their farm office so we can get a tour of their operation, see that it’s well taken care of and better understand what the producer is trying to accomplish," Gent says.

While a farm’s appearance might not seem nearly as important as numbers on a balance sheet, it’s a piece of the equation.

"I look at whether producers can handle themselves and their business professionally," Kessie adds. "If they can, it gives me more confidence."

Communication means telling bankers good news and bad.

"Farmers with communication skills who are proactive with lenders are in the best position," Franzen says. "Bankers don’t like to hear about situ­ations when it’s too late. We know that every day is not a good day."

While numbers are important, you must be able to convey that you know what the numbers mean, Gent says. Lenders also want to know that you have a vision for your farm and a way to get there.

"Producers should be able to specify how they manage costs to maximize profits," Gent says. Less is not always more when it comes to certain input costs or fixed assets that enhance efficiency, he adds. Farmers should not only be able to commun­icate their numbers, but also their risk-mitigation strategies and detailed marketing plans.

"It’s more than saying you want X percentage of corn sold at $6 per bushel," Gent says. "That tells me nothing about profits. Farmers need a specific plan. If they don’t, they can get caught in the emotion of the market and become paralyzed."

Best-risk producers are those who focus on profit margin; they lock in costs and commodity prices near the same time, Gent adds.

For farms with high cash rents, Gent says lenders see less risk in year-to-year leases. Bankers also pay attention to fixed asset costs when assigning risk, such as annual land rent and per-acre machinery costs.

"Fixed asset costs of $400 to $450 per acre are a red flag and not sustainable long-term," Gent says. High fixed asset costs do not equal the best rates and terms.

One great way to manage your bankers: Show them that you live in the real world of commodity prices. "Our long-term projections are all based on $4.50 corn," Gent says.

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