Farm Like A Banker: How To Fund Your Farm In A Rising Rate Environment
Just as your crops will be doing soon, financial risks are growing this year.
“Producers are navigating the risks associated with narrowing profit margins in a high-cost environment,” says Jim Knuth, Farm Credit Services of America senior vice president of business development in Iowa.
While this situation is drastically different than the past few years, it is not an unfamiliar landscape for farmers. The first step is to set realistic expectations for grain prices.
“Most financial mistakes are made at the top of cycles,” he says. “You need to plan around normal margins.”
PUT THE PIECES TOGETHER
Each year, Knuth says, farmers have around five operating capital sources at hand to fund their farm operation:
- Operating line of credit
- Cash on hand
- Accounts receivable to collect
- Inventory to sell
- Vendor financing programs
“Those who do the best job of utilizing those capital choices over the year will minimize interest cost and ensure they have funds available,” he says.
For traditional operating lines, talk to your lender about your interest rate and see if you can negotiate a lower rate or lock it in for the year, advises Jay Landell, director of field operations for Ag Resource Management.
“Some lenders will fix the rate, but that’s probably only for their best customers,” he says. “Most use risk-based pricing based on a matrix where they grade out your balance sheet to dictate the pricing.”
Vendor financing can also be a good option in times of high interest rates, Landell adds. If they offer low or zero-percent financing, you can lower your overall cost of financing.
As you put these pieces together, focus on the bottom line, Knuth says.
“Because of the record working capital many producers have, they are borrowing much less operating capital,” he says. “While interest rates are higher than previous years, a farmer’s interest rate costs may actually be lower. Focus on the actual interest costs versus just the interest rate.”
While you might want to reduce your operating line of credit, Knuth says that likely isn’t the best option.
“We advise producers to keep all of their current credit availability,” he says. “This is important so you can take advantage of unforeseen opportunities or manage challenges. Plus, for most producers having unused credit available won’t cost them.”
STAY ON THE LINE
During profitable and challenging times, Landell’s top piece of advice is to keep talking to your banker. Also, keep your financing options open.
“If you’re getting slow play from a bank, look for those secondary options, as speed is important,” Landell says.
Sara Schafer uses her Missouri farm roots to cover crop management, business topics, farmland and more.
