Everyone's been talking about how difficult this year might be for grain farmers, but ag lenders are just as nervous. No one wants to fail or make poor choices when margins are tight - or nonexistent.
So what do ag lenders want from farmers now?
"The managers who are willing to make the changes when needed are the ones we want as customers," says Craig Olsen, senior ag banker at Wells Fargo in Lincoln, Neb.
In fact, a new mindset is coming up and down the commodity production chain. Retailers know farmers are more price conscious now. Lenders already note a different attitude among farmer customers.
"Everybody is looking at cash flow harder than they ever have and they are going to know their breakevens better than ever, just because they know this year is going to be more difficult," says Olsen.
You can change management practices to improve your income outlook, and lenders can help you make those changes. But be ready for more scrutiny.
"When times are good, it's human nature for all of us to be complacent, and that includes bankers," says Nate Franzen, ag division president at First Dakota National Bank in Yankton, S.D. "In good times we don't ask as many questions because we know the margins are there. But now bankers are going to start asking a lot more questions."
So, what might you hear from your lender in 2015? Be ready for questions like these:
Are you ready to provide better farm financial records?
A very complete and detailed balance sheet is step one, says Franzen. Ag bankers need to know it's accurate, so that means they will likely validate some items they see on the balance sheet. They may want to do a farm inspection to check inventories, or call your suppliers about accounts payables.
"If you want to make a banker uncomfortable, present them with an inaccurate balance sheet," says Franzen. "In the long run hiding things will never work out. On the other hand, if we do a validation and determine you're presenting an accurate financial picture, we get more and more comfortable with you as a borrower."
What do farm bankers look for on balance sheets? Working capital, which is critical going into tighter margins. True working capital is what can truly be turned to cash to meet bills, to buy inputs and make payments, says Ag economist David Kohl. You need to know what the bank is expecting as far as underwriting standards, which helps them determine risk.
Lenders can help you conserve working capital and give you more staying power in a downturn by restructuring debt. You may be able to extend amortization to help ease cash flow worries.
"We can do that if you have extra machinery equity, land equity or even breeding herd equity," says Franzen. "We can reduce debt or even build cash, which gives you more flexibility in a tighter market."
Are you willing to put your farm business through a stress test?
Lenders can provide you with great insight to your business through financial analysis. One of those tools is a stress test – in effect, a 'worst case scenario' quiz to see just how your farm would stand up if times got really tough. Look at cash flows and Profit and Loss statements, especially if your operation has been stable without big purchases. Look at 3 to 5 year averages as a starting point.
"We are going to be doing stress tests on most customers," says Olsen. "It's a good analysis that needs to happen, especially on grain operations. What happens if you have a 10% decrease in revenue or 10% increase in expenses? What happens if interest rates go up two points? You've got to do those tests just so you know what changes should be made in case they become reality."
Franzen agrees. "We may plug in lower land values or prices just to create what-if scenarios," he says. "If you want to impress your lender, producers ought to be stress testing their own operations with best case, worst case scenarios, along with what they think is most likely going to happen to their farm this year. Then lay that in front of the banker and talk intelligently about what is in your control and what is not in your control."