Unfortunately, 2005 is turning out to be an extremely difficult year financially for many crop producers in the Mid-South. For starters, yields will most likely be down from 2004. In addition to lower yields, a surge in crude oil and natural gas prices has increased the cost of diesel and fertilizer, among other things.
As a result of the current situation, ag lenders are closely scrutinizing their portfolios and trying to determine how this year's production problems will impact loan repayment. This article is the first in a series that will address producer strategies for the upcoming loan renewal season.
Work with your lender.
As a producer, it is important to understand that lenders are fully aware of the hardships facing agriculture. The finance community certainly has a “survival” interest in working with and preserving its agricultural client base. This mutually dependant relationship is a two-way street and requires both producers and lenders work together.
There are some key points for producers to consider as they enter the 2005-06 loan renewal season.
The most important thing a producer can do at the present time is communicate with his lender. Do not procrastinate. Discussing potential or existing financial problems is best done early, rather than later. This provides your loan officer more time to plan, evaluate, and provide feedback.
The loan renewal season is extremely busy for agricultural lenders — particularly the first quarter of the calendar year — and this season will be both busy and stressful.
Your loan portfolio and financial situation is one of many competing for attention and accurate analysis. Don't place your farming business at a disadvantage by waiting to secure credit for the 2006 crop. The sooner your financing is secured and in place, the sooner you can comfortably proceed with the decisions related to production, such as field work and purchasing inputs.
- Make full disclosure
Providing up-to-date and accurate financial information to your lender is always important. Lenders base credit decisions largely on the information provided by the borrower. The financial information found in balance sheets and earnings statements is extremely useful in determining key financial ratios and indicators, business trends, strengths and weaknesses.
In order for a producer to receive an honest and accurate assessment of his financial position, the information being analyzed must be accurate.
This is not the first time in history that times have been tough and profit margins thin in production agriculture. Veteran ag loan officers have seen it all and have a set of strategies for dealing with adverse conditions. Full financial disclosure can provide your loan officer with the maximum number of options available to you and your business.
Remember, your lender wants you to succeed and prosper as much as you do.
- Be proactive
Even if your loan officer hasn't requested your financial information, be prepared. A good source of financial information is the balance sheet, income statement, and statement of cash flows. Preferably, these should be done on both a cash and accrual basis. Work with your accountant if necessary to assemble the information needed for these statements.
Be sure to use reasonable values for assets. Also, making debt and loan payment terms clear is helpful as well. As mentioned in the previous key point, every liability should be listed — even credit card debt. The bottom line is, start now assessing where your operation is, and where it is heading.
What resources are available to help producers? The best resource available to anyone facing difficult decisions is information. Have your accountant develop the necessary financial statements and go over them with him or her to better understand your position.
Also, having an informed lender will give you more options to consider. Remember, it is better to communicate early with your banker should you anticipate any financial problems.
Many state cooperative Extension services have personnel available to assist producers in assessing their farms' financial health. These farm management consultants can assess the financial position of a business, discuss the situation with the producer, and develop an action plan for the business.
Information on two such farm management programs can be found on the Internet at the: Arkansas:http://www.aragriculture.org/farmplanning/risk_management.asp and Tennessee:http://economics.ag.utk.edu/mang.html
For more information on Extension farm management programs in your state, contact your local county Extension office or one of us.
Scott Stiles, Rob Hogan and Kelly Bryant are University of Arkansas Extension economists. Comments or questions? Call 870-460-1091 or e-mail [email protected].