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Serving: IA
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CAUTION: Low interest rates can be enticing to borrowers. But after a few months, the rate could increase sharply.

Lender relationships matter

Be careful combining supplier financing with bank financing.

Each month in Wallaces Farmer magazine, the Timely Tips panel answers questions sent by readers. Members of the Timely Tips panel are Alejandro Plastina and Wendong Zhang, Extension economists, Iowa State University; Leslie Miller, Iowa State Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa.

A large seed company is offering low-interest loans if we buy herbicides and insecticides, which the parent company sells. Our banker indicated it will be tougher to renew our operating loan for 2019 with the bank. Is it worth going along with the seed company’s offer to get financing?

Stout: If you are planning on purchasing their seed and pesticides anyway, then it might be good to get the lower financing rate. My concern is you would be limited in your seed and pesticide choices if you go that route. My experience is that not any one company has all of the best products, so I prefer to choose the best products for my situation rather than just go with one company. Visit with your banker to see if you can work something out so you can still get the best inputs at a reasonable financing rate. Often the low interest enticements come with a large increase in the interest rate after a few months at the low rate, so investigate further before jumping into anything.

Miller: The difficulty with combining supplier financing with bank financing is it changes the bank’s lien position. If a supplier would provide financing for crop inputs and timely file a supplier’s lien, they share a first position on those crops with the bank. Most bank loan policies will not permit a lender to finance a crop if they cannot have an “unshared” first lien on the crop. So, for the lender to get approval to finance your remaining operating loan, the loan request might have to go to the bank’s loan committee for approval, which takes extra time. It might also lead to a denial by that committee.

It’s important to read the financing agreements with suppliers very carefully. I’ve seen language where the loan has a very low interest until Nov. 1, but if the loan is not paid then, it changes to a very high rate of interest, and that rate is applied retroactively back to the time when the farmer first borrowed the money. I’ve also seen agreements where a supplier promised to finance all inputs, but then didn’t supply money for pasture fertilizer or for cash rent. This forced the farmer to refinance his operating loans in the middle of planting.

Zhang: While this ultimately depends on the terms of the loans, this could be an option that is worth at least exploring or getting more details given the bank’s reluctance. Consider how long the loans would last, whether the low-interest is just for the first year or first few years, how exclusive the herbicide and insecticide purchase would be and for how long, and how this impacts your plans regarding the ag chemical use.

I assume the bank’s hesitance is due to concerns about your working capital. If so, you should talk with an ISU Extension farm management field specialist, who can walk you through how accepting this offer might impact your cash flow, repayment capacity, current ratio and other measures, and how these parameters could work with your situation for next year. 

The past couple years have been challenging for our corn and soybean operation, and I’m not confident about 2019’s profit outlook. How can I get the best possible plans in place to get through another potentially tough year the best we can?

Stout: First, keep expenses down and don’t spend money on something that doesn’t give you a positive return. Fix up your equipment in the off season to get it to last another year, unless repairs are way off the charts, then look for good used equipment.

If you have been keeping P and K fertility rates in the optimum range, then you could apply maintenance rates rather than trying to build up soil test levels for a year or two. Don’t skimp on nitrogen rates on corn unless you have been overapplying.

Do a thorough job of choosing which hybrids and varieties to plant based on return, rather than just buying seed where you always do. Once you have a handle on expenses, you can estimate yields based on your five-year average, and from that estimate a breakeven price you need to cover your costs.

Study up on your marketing and make sales over the breakeven price on a scale-up basis during traditional seasonal highs in the market. Forward-contract based on your storage capabilities and use the carry in the market to maximize your prices.

Miller: With many economists predicting a $50 to $150 loss per acre on rented corn and soybean land, it’s important to change the terms of unprofitable rental agreements. Unfortunately, we have passed the time to serve notice to the landlords. However, it may be possible to contact your landlord and ask if you can meet to negotiate a change in the rental agreement — maybe changing to a flex lease or dropping the amount of rent paid if it is all paid upfront.

Besides talking to the landlords, I’m suggesting my customers work off actual soil tests not the word from the fertilizer salesman. Also, take a look at herbicide costs. It may be cheaper to use a combination of older chemicals versus the newest and latest thing. (Frequently, salespeople get more commission on the newest chemicals, so they are recommended more often.)

Make sure your seed costs are competitive. There is a huge difference between quotes to farmers. Possibly you can combine your order with another farmer to help you both qualify for extra discounts.

Make sure you get some price floors in place for the crop you’ll raise. Currently, in our area, you can lock in $3.80 or more on December 2019 corn. That price level could work for some farmers. Sadly, on beans, we are not at a breakeven level yet.

Keep machinery repaired and in good working order, but make sure the dealer gives you a quote and asks for your approval before repairs are made. It will keep the dealer from making repairs that aren’t absolutely necessary for the next crop year.

In short, I’m suggesting all farmers thoroughly review their practices for next year to find ways to save money. After all, the definition of insanity is to do the same thing over and over and expect different results. Is it worth losing $50,000 to $100,000 a year just to avoid the hassle of change?

The past couple years have been challenging for our corn and soybean operation, and I’m not confident about 2019’s profit outlook. With this in mind, keep focusing on how to get the best possible plans in place to get through another potentially tough year the best you can.

Plastina: Under current market projections, profit margins for soybeans and corn aren’t very promising for 2019. However, there are a few things you could start doing to prepare for the year ahead:

• Revisit your breakeven corn and soybean prices for 2018. Calculate break-even prices for your owned acres and leased acres separately.

• If you don’t have one yet, develop a marketing plan for your 2018 crop using your breakeven prices, and stick to it.

• Using your actual production history (or another conservative yield estimate), project your breakeven costs in owned acres and rented acres (separately) for 2019.

• Consult with an agronomist; try to identify items in your crop budgets where you could cut costs.

• Project your monthly sales of the old crop, and monthly cash needs over the year (including living expenses) to identify any gaps that need financing.

• Discuss options with your lender; consider your liquidity and solvency.

If you need confidential one-on-one financial counseling to understand the complete picture of your farm financial situation, and whether or not a change is desirable, contact the Iowa State University Extension Farm Financial Planning associate in your area to set up an appointment. The service is offered at no charge. Contact information is online

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