Lenders are wising up. They've worked with enough bankruptcies to know when farmers are in the red. And they can spot a good credit risk from a poor one as fast as you can say “overextended.”
Farm Industry News asked this select group about a topic every buyer of farm inputs should care about: spending. According to Gary Ash, executive vice president for 1st Farm Credit Services in Normal, IL, the problem of overspending is not as big today as it was 10 years ago because farmers have gotten more savvy in managing their cash flow and finances.
However, he says the topic is still important because profit margins have gotten tighter. “Farm income for Midwest grain farmers has been under pressure for the last three years,” Ash says. “Crop prices are down. Yields are down due to drought. And as farmers are trying to get through this period, managing their spending is becoming a more important issue.”
Marc Knisely, CEO for Farm Credit Services of Minnesota Valley in Willmar, MN, agrees. “There's not a big enough margin on the products being produced anymore to give you a lot of leeway,” he says.
We asked farm lenders and farm business management experts what signs indicate spending problems on crop farms. You can analyze the same signs to determine if you're at risk.
- Increased operating line of credit
An operating loan is money borrowed each year to pay for farm inputs such as fertilizer, seed, chemicals and livestock feed. Ash says if you need to repeatedly increase your operating line of credit, you may be spending too much. “If your operation hasn't changed much, yet you need your line of credit increased a couple of times in the fall or from one year to the next, then there may be a spending issue,” he says.
- Selling ahead of plan
Another indication of a spending problem is if you need to sell your crop or livestock earlier than normal to cover cash flow needs.
- Buildup in accounts payable
A third area lenders watch is accounts payable. Ash says if you are not paying them off in a timely manner, that is usually a sign of a spending or cash flow issue.
- Excessive family living expense
Family living includes all cash expenditures for food, clothing, housing, income tax, tax payments, contributions, personal assets, vacations and education. If those expenses exceed your net income, you are living beyond your means, says John Murray, state director for the Farm and Small Business Management Programs, Minnesota State Colleges and Universities.
“Net income from the farm has to pay for family living, reduce debt and purchase new assets,” he says. “If there's not enough net income to support family living or debt repayment, then there's a problem.”
- High credit card balances
Some farmers are hitting their limit on credit cards, which Murray says is a growing problem. “Many ag businesses now let you charge farm inputs to your credit card,” he says. “For example, you can go to your local implement dealer and buy a tractor on your credit card.” Credit cards are fine if they are your only source of debt, he says. But if you use them in addition to having an operating loan through a bank, debt can mount to a point where you can't pay it off.
- Unjustified new paint
Buying new machinery just to keep up with your neighbors is another sign of overspending, especially if you can't afford it, Murray says.
- Canceled insurance policies
Life and health insurance is one of the first things farmers cut when they get into financial trouble, Murray adds. “And they are running the red lights when they start doing that because if an accident happens, they will be in big trouble.”
- Failure to enroll in education programs
Education is another expense farmers cut when income is down, according to Murray.
- Failure to invest in technology
Technologies such as the Internet and a computerized accounting system are musts today to stay informed and cost competitive, Murray says. For example, the Internet lets you check prices, get product information and market reports, and learn new marketing strategies. And computerized accounting is an efficient way to track costs. If you can't afford them, you may be spending too much on other things.
- No cost-tracking system
Howard Siegrist, ag extension agent with Ohio State University, Licking County, says farmers who overspend typically do not track their costs accurately or often enough. “Consequently, they are operating without the information they need and are just floundering,” he says.
- High biotechnology bills
Although biotechnology products can be a cost-effective way to control pests, Siegrist warns you can overpurchase specialty seed traits. “Sometimes the stacked genes may include a trait you don't need to buy and is a cost you don't need to incur,” he says.
On the flip side, some growers fail to buy the biotechnology trait they need to treat the disease problem they have in their region, costing them yield potential. “So being a prudent purchaser of biotechnology is critical today,” Siegrist says.
- Carrying over operating debt
When operating debt builds to where they can't pay it off, some farmers will refinance their farms and add the operating debt to their farm mortgage, explains Al Brudelie, dean of management education for Minnesota West Community and Technical College in Jackson, MN. “Ideally you should close out your operating note every year,” he says. “If you carry it over and add it to your land costs instead, it is a red flag if it happens more than every seven years.”
- More than seven sources of credit
“What happens is, you may buy a piece of equipment and get it financed at one implement company and buy another piece of equipment from a different company and get it financed there,” Brudelie explains. “Then you might buy something else at another place in addition, having an operating line with a bank.” Spreading debt over multiple sources makes it hard for both you and your lenders to track costs and increases the chance you'll overspend.
- Increased borrowing from friends, neighbors or relatives
“This goes back to seven sources of credit,” Brudelie explains. “You can't get money from the bank so you borrow it from your grandmother.”
- Slow at paying payroll
Spending problems also surface if you have employees and get behind in paying them.
- Delinquent taxes
“This is another thing that doesn't always hit the radar screen,” Brudelie adds. It includes real estate or income taxes.
- Negative balance sheet
“You know you've overspent if you are losing money,” offers Mike Duffy, agricultural economist at Iowa State University. And the only way you'll know you have overspent is to keep accurate records of both expenses and returns.
- High machinery bills
Duffy says farmers have a tendency to be overmachined. “They fear the one year of lower yields caused by not being able to get into the fields on time,” he says. “But what they really do is sacrifice income for all the other years. In the end this reduces their profitability.”
- Unable to get a loan
Duffy adds, “If you are having trouble getting a loan, this is a very sure sign.”
Contact the pros
If financial management is not your specialty, resources are available. Your local bankers, farm credit advisors, farm managers and farm management instructors all can offer basic advice on how to manage your business. For example, they can identify and analyze spending issues, provide record-keeping services and training, and help set up long-term business and marketing plans.
As a general source, the Farm Business Farm Management Program provides classes and training. Minnesota was one of the first states to form such a program and has 85 sites where farmers have access to farm business management instruction. Approximately 15 states have similar programs, patterned after the one in Minnesota. Contact www.mgt.org for a listing of the sites and the instructors in Minnesota. The site has a link to the National Farm and Ranch Business Management Association where you can locate programs in other states.