High input costs, weak commodity prices, elevated interest rates and weakening equipment values have exacerbated a decline in working capital on farms across the country. While U.S. producers are no strangers to difficult times, one would have to go back to the late 1980’s to find a parallel to today’s economic landscape.
That made a panel on alternative lending practices a hot topic at the Top Producer Summit in Nashville earlier this month. Here are some key takeaways.
Utilizing Artificial Intelligence:
Alternative lending includes various retail financing options, which can be navigated more efficiently using AI platforms. This approach can drive clarity towards what financing options best fit an operation more quickly and efficiently than weighing each option individually.
“With so many retailer financing options, it’s often difficult to choose which option is best. Throwing them into an AI platform can quickly summarize what will serve your operation most comprehensively,” said Kelly Anderson, senior global commercial development director at Nutrien.
AI can serve in many areas of an operation outside of financing. For example, it can provide agronomic insights and help examine ROI when weighing equipment or land purchases. While many producers are hesitant to give up data, the potential to streamline and create operational efficiencies is certainly worth considering.
With several AI platforms on the market, it’s crucial to conduct research before choosing a specific program to serve your operation. Each offer various levels of accuracy, and it’s important to understand that in the search to secure one on the farm.
Collateral Management:
Managing collateral while seeking alternative lending options can be tricky, but effective communication can eliminate any issues or surprises for lenders and/or borrowers. Know what assets are being held as collateral, and more importantly, have awareness around whether assets are being collateralized properly. Scenarios exist where lenders are over-collateralized. This could ultimately present a position of limited borrowing capacity in an alternative setting.
In the case of mortgages, know when the last appraisal was completed — it’s not uncommon to have amassed notable equity in a property that is being mortgaged. This could free up working capital or be considered as collateral when assessing land purchases.
Make sure to identify what levels your lender is willing to loan against an appraised property. Industry standards exist, though more difficult economic times may drive institutions to alter their original guidelines, to account for a potential decline in land values.
Equipment lists should be reviewed annually. In doing so, understand what pieces have liens. If a payoff has occurred, make sure the lien has been released. If the institution has kept the lien, understand why.
Having several financing outlets isn’t necessarily a negative, but it certainly drives home the importance of knowing how assets are being collateralized. Try to update your financial statement on a quarterly basis. This will help drive awareness around your collateral position and allow for easier conversations with lenders.
Leverage, Stale-Debt & Stress Tests:
Managing a highly leveraged operation and/or stale operating debt are certainly challenging but not impossible. Ashley Arrington, director of strategic partnerships and marketing at Ag Resource Management, said that producers should take a deep dive into their balance sheet. It’s imperative to grasp whether it’s a short-, intermediate- or long-term problem that’s causing a strain on working capital. Even if a producer feels as though their financial position is favorable, there is value in taking actions to ensure potential issues have not been overlooked.
Be proactive — make a list of potential concerns and construct a plan to overcome them. Give yourself a timeline and stick to it. If a specific farm or piece of equipment is a drag on your profitability, find a way to release the financial pressures they cause.
Stress-test your financial statement. This could help drive awareness around what could be an issue down the road. Look for a nonbiased resource, who could offer a second opinion or different perspective toward your operation’s financial position. Retired bankers or someone with strong business acumen could be an asset to your operation in that realm.
Industry Consolidation:
The current economic backdrop is pushing retirement age producers away from day-to-day operations, but passing management and ownership roles on to the next generation requires careful consideration. Detailed discussions with each family member involved in the transition is a key to a more painless transition. Make sure your spouse always knows your intentions and make time for discussions with each of your children, even if they’re not involved in the operation.
What’s fair isn’t always equal – and creating transparency and an open line of communication between all involved could eliminate difficulties and strained relationships down the road.
Moreover, a comprehensive succession plan is also a key element in operational longevity. Financial institutions may provide lower interest rates or other concessions to reward those who take the proper steps to ensure a smooth transition to the next generation. Change is inevitable, and planning for it should not be an impediment.
On the topic of industry consolidation, smaller community banks could become a purchasing target of larger, regional banks which employ more efficient practices. Producers should be aware that this is certainly a possibility, and something to prepare for.
Purchases, Cashflows & Cost of Carry:
When it comes to assessing potential land purchases, a strong equity position from unencumbered land is certainly a favorable factor for producers who have a next generation rising through the ranks. However, this is a prime example of when thorough communication is key. Every purchase, be it land or equipment, must be weighed carefully by each member of the operation. Strive to understand each perspective. Times like the present can lead to changes in how ROI is viewed among owners and the degree of involvement in the operation.
Other management practices that are crucial in any environment are creating monthly cashflows at the beginning of the year. This helps drive timely and information-driven marketing decisions. It’s a great way to remove the emotional element from making grain sales, as it converts the act of marketing grain to a business decision.
Understanding cost of carry is also prudent and highly essential. Storing grain when it’s costing you money, even though you can’t see it, is not an ideal or profitable scenario.
The Past is the Past:
Alan Hoskins, president and national sales director of American Farm Mortgage and Financial Services, likened balance sheets to looking in a rearview mirror. “What’s done is done, it’s time to focus on what’s next.”
Producers should be entering the growing season nimbly and recognize that now is the time to get any hard work that needs done out of the way. “Know your financial position and defend it – producers are ultimately in control of their financing and can certainly choose how and who they do business with.”