Bret Davis grows the corn and soybeans. But it takes teamwork with his lender and marketing consultant to make his financial plan perform.

The Delaware, OH, farmer grows about 3,400 acres of corn, soybeans and wheat and is a farmer-dealer for a seed company. He’s in partnership with his stepson Wade McAfee, and has interests in another farm. However, Davis doesn’t make many major moves without huddling with his other teammates.

They are Kent Kramer, his loan officer at Delaware County Bank & Trust, and Mike Hogan, a West Bend, WI, consultant/broker with Stewart-Peterson. Kramer is also a corn and bean producer.

“We put together a financial plan, not just a marketing plan,” Davis says.

Blueprints of the plan begins long before the first seed’s planted. “We project our inputs, yields and cash-flow requirements,” says Davis. “We must also have a marketing plan in place. Then we’re prepared to work with our banker, Kent.

“We usually get with him in January and August to go over where we are and what we have in mind. Last January he told us we had done a good job of marketing, especially with our hedging,” Davis says.

Hogan’s expertise has taken some of the selling pressure off Davis. “I learned a lot from my dad, who was an excellent marketer and did a lot of the marketing myself until a few years ago. After the wild price volatility in 2008, I knew I needed a better hands-off approach.”

He worked with Hogan to establish futures and options strategies that complimented his forward contracting with local elevators and a POET ethanol plant.

“My goal is to have 40% of my crops marketed before we plant,” says Davis. “We sometimes have 60% sold before we finish planting. We had much of our 2010 corn contracted at about $4/bu. and some soybeans booked at $9+ and some over $10.

“Mike (Hogan) helps us get some hedging in place after we’ve sold for cash, such as out-of-the-money call options to take advantage of increases in the futures price.

“I still like to sell my own grain and try to wiggle a few pennies (per bushel) out of them. I like that we can contract to deliver to the ethanol plant the following June or July after harvest and still see about a 20¢ basis improvement and still be covered with the 2½¢ carry for storing it on farm,” Davis says.

“But having a marketing consultant to provide additional marketing strategies is worth a 3-4¢/bu. fee for the added dimension. Mike looks at the big picture,” he adds.

Kramer quips, “Bankers have their own mindset, and it is cash flow, cash flow, cash flow. They are focused on the client’s ability to profit along with the capacity to make his debt payments. It is not just a matter of how much collateral you can offer anymore.”

The marketing end of Davis’ operation probably interests him the most. “Bret is good in the field and has a pretty good handle on marketing. But he likes having the marketing service to enhance his situation,” Kramer explains. “To maximize your income potential, marketing can be a full-time job, whether you do it yourself or use a consultant. Bret has a team that helps him get the most out of his business.”

Davis admits emotions can easily take over if the market increases and you’ve already sold your crop. “I like having positions in place to make up for any losses on already sold grain if prices go up,” he says.

“The marketing service usually knows when I need to move on a position or take out a new one. But before taking any action, they ask if I feel comfortable doing the transaction.

“That’s why they’re part of my team. And it helps my situation with my lender. I know Kent will stand by me at the bank,” Davis says.

Do Marketing “Mistakes” Impact Loan Status?

Growers with tighter margins and a weak marketing program may face higher interest rates and/or require more collateral to secure a loan, says Kent Kramer, assistant vice president at Delaware County State Bank & Trust, Delaware, OH, and also a farmer.

“That is assuming they get approved at all,” says Kramer, who deals with farms of all sizes and farmers who are good and bad marketers. If they don’t have a marketing plan, they’re probably leaving some money on the table.

“A bank loan committee looks at a producer’s management skills and marketing abilities. They compare the income per acre to industry and local trends. If farmers don’t market well, it will show up in the analysis process and that’s a red flag.

“The most common mistakes I see are among growers who don’t closely track their income vs. expenses or don’t watch the market and sell during a spike in prices,” Kramer says.

He says his more successful farm customers operate them like many large-scale commercial businesses, with detailed budgets, marketing plans, financial plans, transition plans and outside consulting partners.

“The smaller and less-sophisticated operations often lack the higher level management needed to quickly adapt and change, and often have smaller profit margins,” says Kramer. “They’re still good clients, but I’m always concerned that in tough times it may be difficult to fund that type of operation without some other strengths like off-farm income or additional collateral to secure the loan.”

Marketing and financial plans should be clear. “If I can communicate the farmer’s plans to the loan committee, it improves its confidence level in the client’s management skills,” Kramer says. “If the loan committee believes the client is a higher risk it will mitigate that risk in the form of higher interest rates and fees.”

Kramer has advice on selecting an ag lender, in light of the weak economy. “First I would reach out to other farmers,” he says. “They may not say where they bank, but most farmers I’ve met are willing to tell you what bank they would never set foot in and why.

“Then quiz the banks about their plans for ag lending. Most banks have defined their markets and will let you know if ag is in their long-term plans and how they intend to be involved in it,” Kramer says.

“If you have a lender, ask them to point out what they see as strengths and weaknesses in your operation. Then you will know where to focus more attention.

“Finally, even if you have a good banking relationship, don’t be afraid to talk to more than one lender. Competition for your business may benefit you in the form of a lower rate or fees. In the event something does change with your current lender, you will have a backup plan,” Kramer says.

November 2010