We have all heard the phrase “Hindsight is 20/20.” Now that we are almost in the year 2020, it may be time to reflect on some of the things we should have learned during the past year.
Obviously, the last several years have been economically difficult for farmers. As such, it is more important than ever for farmers to have a solid grasp on their “numbers.” These numbers include:
- a current balance sheet showing assets, liabilities and net worth
- an income statement showing the cash flow from the previous year
- a financial projection for the upcoming year
- the cost of production
- key ratios such as equity, debt coverage, return on assets and return on equity
In the farm sector, there are many talented consultants a farmer can hire to determine these numbers. In addition, there are numerous courses taught on this subject (such as those given by Gary Siporski, David Kohl, PDPW, etc.) that can educate farmers on how to analyze these numbers for their farms. During the past year, farmers have learned the importance of these numbers, and the farmers who know them are more successful than the ones who don’t.
Former President Ronald Reagan once quipped: “The most terrifying words in the English language are ‘I’m from the government and I’m here to help.’” However, in farming, the government often is there to help.
Farmers should educate themselves about the various Farm Service Agency loan programs and the loan limit increases that were enacted as part of the 2018 Farm Bill. Dairy farmers should also educate themselves about the Dairy Margin Coverage Program, which was created as part of the 2018 Farm Bill.
The FSA loan programs and safety net programs have very detailed eligibility requirements. Farmers should know the requirements and make sure their farm business structure is set up to take advantage of these programs.
As dairy farmers have found out during the last several years, milk contracts are written vaguely and with little detail, which allows processors full discretion as to the “when” and “how much” regarding procurement. The dairy sector has always had discretionary pricing — i.e., where the processor is allowed to set and change the price.
In contrast, in most industries where the price is unknown, a contract is written so the price must be determined by mutual agreement or by using an agreed process. Farmers should have learned that their milk contracts need to be reviewed. As the dairy economy improves, farmers should take that opportunity to ensure their contracts are written fairly.
Comedian Bob Hope once described a bank as “a place that will lend you money if you can prove that you don’t need it.” The fact is that Bob had quite a bit of his own money and did not really need a banker. So, he could make jokes about them. However, most farmers do need bankers and should know what bankers look for — often called the “5 C’s of credit.” They are:
1. Capacity. Does the farm have enough income to service its debts and have a cushion to absorb unexpected expenses?
2. Capital. Does the farm have enough net worth?
3. Collateral. Does the farm have enough assets to leverage to secure loans?
4. Conditions. What is the state of the general farm economy and the trends in your particular segment of the agricultural industry?
5. Character. What is the credit history, education, age, background and personal integrity of the owners of the farm?
When times are tough on the farm, a farmer’s attitude can make a big difference. We all know about the tragic number of farmer suicides that have happened during this farm crisis. However, during the last year, farmers hopefully have learned that there are many resources available to them and that getting help does not show weakness. Believe it or not, farmers can learn coping strategies to deal with stress and depression. Several of these coping strategies include positive thinking, cognitive behavioral therapy (thoughts, beliefs, attitudes and behaviors) and mindfulness.
Hopefully, you can see that hindsight is 20/20 — we all would do things differently had we known then what we know now. But the most important thing to see for 2020 is not what you could have done, but the real opportunity you have to do things differently.
Schneider is a partner in the agricultural law firm of Twohig, Rietbrock, Schneider and Halbach. Call him at 920-849-4999.