by Mark Parker
Parsons, Kansas —
From weather to politics, farmers and ranchers are confronted with financial challenges that sometimes demand more than their own business savvy.
Sometimes, accessing specialized expertise is the best way to navigate difficult financial situations.
Although Mother Nature is frequently a major factor, economic challenges can arise that have nothing to do with what falls into the rain gauge, according to an agricultural finance specialist.
“There are a lot of ways we can have curves thrown at us that affect farm business success,” says Jeff Smith, a Frontier Farm Credit financial services officer working out of the Parsons, Kan., office. “Health and family issues can certainly have an impact and even events off the farm that we have no control over can change a farm’s financial picture.”
Managing risk, advantageously structuring debt, keeping good records and communicating with lenders are critical components of successfully dealing with financial challenges.
Smith suggests that a good place to start is matching crop insurance coverage to the financial needs of the operation.
“Crop insurance needs to be tailored to fit each farm business,” Smith says. “It’s not a cookie-cutter situation. Each producer should assess the amount of risk he or she can afford to take. Making sure you cover input costs and debt service is a good benchmark — you don’t want to roll over a large operating loss onto your debt structure.
“It just doesn’t make good business sense to take that risk.”
He emphasizes that every farm business is unique and advises farmers to work with their lender and crop insurance agent to ensure that coverage reflects the short- and long-term financial needs of the operation.
Debt restructuring may also be needed when financial challenges or operational changes occur and can be advantageous to the borrower.
“Many times, restructuring debt isn’t something the borrower wants to do but it can make good financial sense in many situations,” Smith explains. “Sometimes we go through tough times. Inconsistencies in the weather, volatile prices, input price spikes, unforeseen repairs — even international economic and political issues far beyond our control — can create financial hardships.
“That’s a good time to sit down with your lender to see if restructuring makes good business sense. A farmer may benefit from rolling operating debt into term debt, especially when rates are relatively low and he or she can lock those rates in for a three- to five-year period. Restructuring doesn’t have to be bad news — it can be advantageous.”
Smith notes that debt restructuring can also be used as a tool when a farm business goes through structural changes.
“Maybe the farmer is making cattle a bigger part of the business or maybe he’s adding a new enterprise,” he says. “Debt restructuring may be required to get assets and liabilities to line up to more accurately reflect operation finances. That may be especially true for expanding operations or those with changes in the ownership structure.”
The Frontier Farm Credit financial officer also emphasizes that solid business planning and recordkeeping are more important during uncertain financial times. He points out that Frontier Farm Credit offers its customers important business services that include accounting, recordkeeping, tax preparation and more.
Recordkeeping services, Smith adds, include wide-ranging reports that can help the farm operator identify problem areas as well as those with potential. They include profit and loss reports, cash-flow reports, ratios analysis, forecasts and budgets.
“Good accounting, good recordkeeping and good financial planning are always important but they’re even more critical during tough times,” he says. “Getting financial expertise working for you can make a very big and very positive difference — it’s just part of being a good business manager.”
Finally, Smith says, good communication between lender and borrower is an absolute must.
“It’s a lot easier to work through hard times if we’re working together and both lender and borrower are fully aware of the total situation,” he says. “It’s not a good idea to be forced into a last-minute decision when you have the opportunity to work through financial challenges over a period of time. If you keep the lines of communication open, you’re going to have more options to deal with the issue.
“We believe in ‘no surprise’ lending. That works both ways — no surprises for the borrower and no surprises for the lender. I can’t stress enough the importance of good communication — it helps open doors instead of closing them.”
Smith points out that no one in production agriculture expects the road to financial success to be smooth year after year. Having a lender who understands that fact is an important asset to any agricultural business.
He adds that working with a lender who understands agriculture and is willing to work with the borrower during the tough times as well as the good times.
“Using credit effectively can help farmers and ranchers take advantage of the good times as well as weathering the bad times,” Smith concludes. £