Five years ago, the farm economy looked much different. Prices for wheat exceeded $8/bushel. Corn prices were near $7/bushel. New calves are at $200/cwt. It looked as though prices would continue to increase for years to come. Producers were looking for ways to expand their farms, purchase more and better equipment, and expand their herd.
Fast forward to today. We are now 4-5 years into the commodity super cycle turning from the past years of the peak. We may have another 4-5 years in this portion of the cycle before commodity prices turn up. Lenders are dealing with producers who cannot pay off their operating lines. Perhaps this has now happened 3-4 times. Some farmers are contemplating if they should consider leaving the industry and some lenders are wondering if they will ever be paid off.
We are at a time in the cycle when a proper assessment of producer management is essential to understanding which borrowers are the ones you want to stick with and which ones you need to take a different approach. A good economy can hide a multitude of management errors. A producer lacking management skills will tend to see larger losses and bigger problems in bad agriculture times.
There are four areas that I suggest agricultural management be looked at. I will touch on these in this blog but note that we will go more in detail in our Managing the Agriculture Loan in Good Times and Bad class. We are holding this in Bismarck on September 19 and 20. You need to contact us to get signed up.
The first area is financial management. One of the best questions to ask is if the producer truly understands his cost of production. What is even more impressive is if this is written down or on computer, and if this is also divided up by each crop or ag enterprise. If your producer does not truly understand this, how will you the lender understand? Also, if they have no idea on their costs, why would you want to lend with them? A borrower with a strong, written command of their input costs will outperform the farmer who is winging it.
Another one of the eight financial factors we have deals with capital spending. Does your producer have a capital spending plan? How many years out does it cover? Is the budget geared toward increasing the farm efficiency and income or is it based around shiny new iron in the barn? Is the budget followed?
The second area of management is production. If you have a farmer, how does his production per acre compare with the county averages? How does the rancher’s herd in sale weights compare to peers? Is there a pride of ownership with the farm? Is the farm well-kept or does it look like a junkyard?
The third area is marketing and risk management. One of the most important factors here is if there is a solid marketing plan that is written and executed. Is there a plan that may involve forward contracting or hedging to secure prices or are the prices solely at the whim of the market? We all have seen some clients who refuse to sell crop in hope of a better price in the future with no solid plan. All this revolves around is a wish.
The fourth area, I title as other factors. One of these factors is a transition plan. What plan does the farmer have for the next generation? Is this plan well developed with key advisors like attorneys, accountants, and lenders? What key skills are needed to keep the farm successful in the next generation? Is there a plan to make sure these skills and resources are available to the next generation?
These questions are some that are key to understanding the management skills of your producer. This is perhaps one of the most important time in the farm cycle to be accurate on how well the producer will be able to improve their current condition. We will be reviewing these factors in our class in our section to assess agricultural management. We look forward to seeing you in Bismarck. Use this link to get more info and to sign up. https://pactola.com/education-opportunities/