Lenders take a critical look at balance sheets

Farm Forum

Taking a critical look at balance sheets relating to costs and equity will be essential in today’s ag environment. At the recent Executive Women in Agriculture Conference in Chicago, Chris Barron and Emily Florry of Carson and Barron Farms Inc. of Iowa said that in today’s agriculture economy, it’s important to know which items are of top concern for lenders. The two offered a number of tips.

Barron said he started talking about margins when margins weren’t cool. With the slim difference between inputs and outputs, this year presents plenty of challenges which can make a big difference in operations.

“In the past, we’ve seen increased land rent, corresponding with an increase in price,” Barron said. “But now we’re continuing to see increases in land price. Corresponding prices for commodities are down.” Barron suggested preparing a strategy with a five-year plan to know what prices should be and acting accordingly.

Building relationships is important, especially when talking business with lender and landowners. He said producers should know their numbers and write down what yields and returns they experienced in the last four years. That shows the trends for their operations.

“Lenders care about how much equity you have,” Barron said. “And that comes from managed growth, not luck.” He said farmers should set two or three goals for each ag operation and avoid taking on too much. That way the producer will have everything in control.

Profitability, not the number of acres, is the key to growth. He cited two operations, one with 2,500 acres and the other with 1,375 acres. They both have shown the same level of profitability. What is the best way to help those operations? It depends on two questions: Do you want to grow? And then, what will it take to grow?

“Let’s not do more of what’s not working. More is not always better,” Barron said. “More is not a solution to profitability.”

Remember to put the operation in perspective. He asked, “Are you looking at things from 100,000 feet in the air, 50,000 feet or are you at the 50-foot level. Someone at the 50-foot level doesn’t see the overall picture. They see only driving a truck or feeding some animals. They don’t understand how it all gets brought together with the planning for the future instead of one day at a time.”

As for marketing, Barron said producers never sell enough when they should. Barron asked, “If corn would get to $4, would you sell? The sale is more fact than emotional. You need to know what prices you need and how to get there.”

In conversations with a number of lenders, Barron and Florry developed a list of items that concerns lenders heading into 2015:

Top ten list of banker’s concerns

1. Growing line of credit regarding principle and interest payments: With fixed costs up, there are fewer dollars to make payments. You need to figure out ways to compensate for the cash that won’t be there this year to operate next year.

2. Cash flow/working capital: Look at the projected versus what actual amounts are available. Cash is king. Barron said there is some concern in the Dakotas where operations are losing up to $100 an acre. If there is a good track record, lenders have been good about sticking with them. Provide the lender with the detailed information. That may impact interest rates.

3. Bank examiners: There are concerns about what has happened in the past. Increased regulations have been put in place to prevent an artificial “land bubble” from happening. Bankers are coming off the housing crisis, and they don’t want to have the same thing happen with land.

4. Balance sheet inventory: Be able to explain why volume and value are going up and down.

5. Balance sheet consistency: Make sure that land and equipment values are not inflated. If you’ve added to the line, take that value. Ask implement dealers, “If I drove this tractor onto your lot, what amount would you write on the check for it?” Take a more conservative stance on what you have.

6. Other/outside debt: Take into account the operation’s personal debt. It may be a brother, dad or others who have a bunch of debt and rely on the farm for support.

7. Interest rates: They are now as low as they can be. “As lines of credit grow and get bigger, we see some lines of credit at 3 percent versus some at 7 percent,” Barron said. “There’s a big difference on a line of credit for $1 million. It can be a $30,000-$40,000 difference. Farmers need to know how to manage it. You’re going to be borrowing more money to handle the added expense.”

8. Farm Efficiency: Amount of equipment and labor compared to amount of land.

9. Risk management plans: What is your plan for farm transition? Does your insurance adequately cover your structures and the people who work for you?

10. Business structure: Banks want to know that you are aware of trends in the industry and stability of your farm.

Barron emphasized that yield is still the key to profitability.

Florry said in 2015 operators need to look at their operation and figure out how to get more out what they have.

“Look at the alternatives,” Florry said. “Get the right product on the right acres and pay close attention to seed costs. Consider if you cut back on fertility next year, how will it affect the next year. A loss of 100 ears per acre can equal a loss of 5 to 7 bushels an acre and that can make a huge difference.”

Price and yield together create a moving target, Barron said. “Watch the numbers carefully. If the price of corn goes down 40 cents a bushel, how much does that change your margin? If the corn yield changes by 25 bushels per acre, how much does that change your margin?”

Barron said to look at management tools in your business to work closely with lenders.

“Stay focused on what you’re doing, not just for the dollars, but for the future of your family,” Barron said.

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