It’s that time of year again. Farmers are starting to think about meeting with their lenders and planning for the next growing season. We’ve scoured the internet in search of the best writing on the topic, and articles in Farm Futures, AgWeb, and Wallaces Farmer came out on top. Below are our 3 takeaway tips on what to think about before meeting with your lender this year.
1. Make a Realistic Budget
We’re facing a tough year with slim margins. You’ll want to be sure and cut back on expenses if you can. Don’t spend money on anything that doesn’t give you a positive return. There are a lot of ways you could go about it. Wallaces Farmer suggests making repairs on equipment instead of purchasing new, and adjusting fertilizer rates to maintenance levels as a few examples. They also suggest choosing hybrids based on returns, rather than just buying seed where you always do.
Don’t talk to a lender without a realistic crop budget in hand. Use your actual production history to calculate yield projections. You can factor in yield enhancements, but don’t forget to count crop insurance. Make sure you know how your rent amounts compare to others in the area.
2. Make a Marketing Plan
Any marketing plans should support your budgeted prices. Know how you’re going to manage risk. Sam Miller, managing director of agriculture lending for BMO Harris Bank says there are more tools than ever available now to help farmers to manage their price risk.
“The time to do it is look forward, look at the futures market, see what those prices are and determine if you can take some of the risk off the table,” he says. “Unfortunately, it’s not a one-time decision, it’s something you’ve got to be doing all the time.”
Having a plan and following through on it makes you a more attractive investment from a lending standpoint.
Make sure you get some price floors in place for the crops you plan to grow. Consider locking in some rates on corn for 2019. Unfortunately, beans aren’t at a breakeven level yet.
3. Ask about Restructuring, and Be Prepared to Discuss Covenants
Ask about restructuring. If you’ve been with a lender for several years, it might be time to have a very open, frank discussion. Ask them what they believe your strengths and weaknesses to be. They may just have a few insights into your operation that you’ve never really considered. They might know some things that other producers in your area are doing that are worth taking a look at.
When looking at different financing terms, maker sure you’re aware of the covenants. Covenants are conditions on loans that stipulate certain requirements, or they can forbid you from taking specific actions. For example, some banks have maximum cash rent limitations. If you’re not paying the highest rent and you have a solid repayment history, covenants are less likely.
Think long and hard about financing through your seed supplier. Though it’s possible that their terms could be more favorable than those from a bank, you might be limiting your options. Some seed companies may offer special financing if you also agree to buy their herbicides and insecticides. If you’re planning on doing that anyway, then that could be a great deal for you. But often times, one company doesn’t have all the best products, and it would be more beneficial to you to pick and choose.
In addition, sometimes these fantastic low interest rates offered by seed suppliers only last for a few months of the contract, or there are other unusual terms. So make sure you know exactly what you’re getting before you sign a deal.
Crop prices are down, and input costs for 2019 are expected to be steady or higher. Interest rates are expected to go up. We’re headed into an industry wide economic recession, and it’s only going to become more difficult to secure operating credit. Don’t be surprised if you’re asked to provide more documentation this year. During low cycles it’s normal for lenders to perform a deeper analysis. Try not to take it personally. Be sure to talk to your lender early and don’t be afraid to ask a lot of questions.