What to communicate to your banker now

A farmer going dark on his or her banker is the first warning sign of trouble to come. That's according to Curt Covington, senior vice president of agricultural finance at Farmer Mac and a 30-year veteran of ag banking.

Today's tight margins are cause for many ag lenders to be spooked about their farmer clients. For that reason, Covington preaches "constant communication."

Keep strong lines of dialogue with all key farm stakeholders—especially your banker, Covington advises. As with any other problem, a farm conflict is best dealt with sooner rather than later after it has festered or worsened, he says.

Plus, trusted advisers can provide valuable intelligence.

"Your vendors are servicing hundreds of your competitors and could provide you advice and new ideas," he says.

As you visit with your banker about your 2016 plans, don't be surprised if they want more information and documentation than ever before, notes Chris Barron, a consultant at Ag View Solutions, an Iowa farmer and a Top Producer columnist.

Listen to the Top Producer Podcast as host Pam Fretwell talks with Chris Barron about business solutions for a tight financial environment:

"Lenders are looking at the risk level of their farmer customers," Barron says. "Producers are typically optimistic about prices and yields. What the lenders will do is pull price projections and yield expectations down to stress-test your cash flow."

Because many farmers are borrowing a larger line of credit, Barron says, it's important to develop a working capital improvement plan.

"To improve working capital, there are only two things you can do: Spend less money or increase productivity and profitability," he notes.

Start with expense improvement. Barron suggests looking at these options:

  • Enact a purchase freeze. Let everyone in the operation know that no major purchases can occur for the rest of the year. Agree that any expense over $500 must be approved by the management team.
  • Take a hard look at compensation. You may have to trim salaries a bit in years like this or consider not replacing team members who have left the operation. If you hire part-time help, see if you could get by with your current team instead of outsourcing jobs.
  • Look at restricting debt. If working capital is low, review your loan options. Be sure to talk with your lender about this decision so they understand why you want to restructure debt (and that you're not just covering up losses).
  • Liquidate unused machinery. Yes, selling machinery is tough right now, as equipment costs have gone down. But on the other hand, there's cash sitting in assets that are not generating any revenue. Even unloading less-expensive equipment can add up to decent savings.

Above all, Barron says, you should look at your budget every month. "Pull the detail out every month and have everyone in the operation look at every single line item," he says. "Paying attention to details isn't an option any more—it's an absolute necessity."

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