The economic reset of the last few years is increasing farm financial stress. Lower income continues to strain working capital and more farms are becoming highly leveraged.
On average, ag bankers expect farm loan defaults to climb by 10.9%, according to the May 2019 Rural Mainstreet Index. This is more than double the estimated rate of growth just two years ago.
In reaction to higher default rates, nearly 62% of bankers have increased collateral requirements. Additionally, one in four bankers report rejecting a higher percentage of farm loans due to declining farm income.
“This is not the 80s, but it is an era that will be remembered,” says Dan Gieseke, Missouri farm loan chief for USDA’s Farm Service Agency.
Are you teetering on the edge of profitability and business sustainability? Here are some strategies to create an offensive farm business plan.
1. Identify the source of your cashflow shortfall.
First determine the “why?” behind your financial challenges, Gieseke says. “We have to quit saying the ‘why’ is poor prices,” he says. “Illness and divorce can be a hit, but the biggest hit is expenses: operating, capital and living.”
Analyze your financial statements, expenses and debt structure, he suggests. If you struggle in this area, ask your lender for help.
“Wishing and hoping for higher prices won’t work,” he says. “You have to create a plan, and the status quo is not a plan.”
2. Make an accurate projection for your family living expenses.
Now is the time to be financially conservative, says Matt Roberts, founder of The Kernmantle Group, an economics research and training firm. Family living expenses for farmers increased dramatically in the last decade. While they are hard to take down, he notes, analyze where and how you are spending.
Start by creating a realistic projection for family living expenses, Gieseke says. “$24,000 a year of family living for a family of four is not realistic,” he says. “Know the actual number. Then you can decide if you need to go on a family living expense diet.”
3. Find ways to increase net farm income.
The goal for every financial decision should be to build wealth, Roberts says. “The first part of building wealth is building working capital,” he says.
To increase net farm income, you may have to make tough personal and business decisions, Gieseke says. That may include finding off-farm employment for you or a family member. Or you may need to sell non-productive assets, such as poor-quality land, lake houses or UTVs.
Explore and do the financial analysis on a new niche project or service, Gieseke suggests. “Straight corn and beans are not the way to building wealth,” he says. “Innovators and those who are willing to change will succeed.”
4. Evaluate every cash-rent agreement.
Are you making money on your cash-rented ground? If not, discuss your financial situation with your landlords, Roberts recommends.
When talking with your landlords, share your cost of production range across all your fields, he suggests. Then show each landlord how his or her farm fits in that range. This level of transparency will build trust with your landlord and help make your case for adjusting rental rates.
Don’t be afraid to walk away from a non-profitable situation. “If you can’t walk away, you can’t negotiate—that’s the truth,” he says. “But if you can take them an understanding of why you might walk away, you might not have to walk away. Use your records to prove your point, as having records means all the creativity comes on the table.”
5. Build out your bench of experts.
These are unprecedented and challenging times. Use trusted business partners to help you reach the best decisions for your farm.
“Manage your strengths and staff your weaknesses,” Roberts says.
Use your banker, CPA, agronomist, attorney and other advisors to strengthen your business. For instance, ask your lender: What improvements would you like to see? What are your working capital standards and how close am I to reaching concerning levels? What would strengthen my lending portfolio? How do you evaluate my business?