We teamed up with Farm Journal to ask experienced farmers to share their best advice with young and beginning producers. The result is Practical Wisdom – the sharing of knowledge from one generation to the next.
Communication is key
Maintaining good communication with lenders has become increasingly important as operating margins have tightened.
“Communication is key,” wrote Josh Williams, an Iowa farmer. “My lender and I always discuss alternatives and different ideas for upcoming years and production practices.”
“Discuss often what you are planning, and keep your lender as a partner in your operation,” advised David, who farms in Washington state. “Your lender has lots of information and wisdom on the financial side and can contribute strength for your operation.”
Several operators wrote about the importance of lender communications.
“Make an effort to have frequent one-on-one interactions,” wrote Greg, an Illinois farmer. “Lenders don't like surprises any more than we do, so the quicker you interact in the case of a problem, the better.”
“Be honest and have accurate records,” advised Guy Mills Jr., a Nebraska farmer. “Accurate records will show a lender what has happened, but more importantly show how growth can happen. Invite your lender out to show what you are doing. Have no surprises.”
Critical Measures for Your Operation
When it comes to reviewing a customer’s financial standing, lenders keep an eye on several measures of stability. Rachel Mehlhaf and Greg Lund are colleagues at Farm Credit Services of America’s office in Sioux Falls, South Dakota. They offered their perspective on the key metrics.
“Working capital is critical,” said Mehlhaf, vice president of retail operations. “In the current environment where grain prices have turned down, a proper level of working capital allows a producer greater flexibility when profits are minimized or disappear.”
The operator’s net worth, or debt-to-asset or equity-to-asset ratios, are another measurement lenders assess, noted Lund, a financial officer. “This is important because the more of your asset base you own, the better you will be able to handle short- and long-term adversity,” he explained.
Know your break-even
Mehlhaf and Lund agreed lenders like to see the operation’s break-even levels.
“Are you a low-, medium- or high-cost producer? Knowing break-evens enables a farmer or rancher to better market grain or livestock with confidence, cut expenses where possible, and plan future purchases,”
– Greg Lund
The use of crop insurance to manage risk, and a written marketing plan, also are pluses in lenders’ minds.
“It is important to understand the risk protection that crop insurance provides and to enhance marketing skills so you can use advanced features to benefit your operation,” Mehlhaf said.
“Having a written marketing plan you can revisit often helps take emotion out of your marketing decision-making process.”
– Rachel Mehlhaf
Producers also should review the current structure of their debt. “Will the way your debt is currently structured serve your operation well into the future?” asked Lund. “Long-term interest rates are at historical lows. Locking in a low interest rate now can protect your operation for years to come.”
Evaluate the family’s standard of living
A final point is to evaluate the family’s standard of living and whether the operation can sustain current levels. “Understand that the amount of the personal draw that is sustainable can change from year to year,” Lund said. “Consider whether off-farm employment or diversification are required to meet living needs.”
A veteran Indiana farm operator offers some sound advice related to the producer-lender relationship.
“Tell the truth all the time, pay your bills on time, and have a cash reserve,” advised Max R. Sullivan. The best approach, he wrote, is to “have a modest lifestyle, a modest house, a neat farmstead, and a loving family.”