Paul Graddy returned to the farm five years ago after several years working in Walmart’s management sector. He took with him the concept of always knowing his inputs and outputs to take the guesswork out of farming profitably and, in the process, establishing a trusting relationship with his lenders.

By planning, it changes the trust factor with lenders, he says. When lenders call him, he can give them a full rundown of how he’s executing his plan. “They know I’m here to manage and not just fly on the whim and have unexpected expenses.”

Graddy, who farms 1,000 acres of corn and soybeans with his father-in-law in Funk, Neb., knows each year’s controllable and uncontrollable costs inside and out. (Photo: studiocasper/Thinkstock)

Graddy, who farms 1,000 acres of corn and soybeans with his father-in-law in Funk, Neb., knows each year’s controllable and uncontrollable costs inside and out. He does cash-flow projections for one-, two-, three- and five-year outlooks, and has a goal sheet to account for long-term items, such as equipment. 

“Coming from that business background, it was eye-opening how you can stay on a budget and plan in farming,” Graddy says. “You don’t have to guess and hope.”

Graddy says tougher times mean making tougher decisions on inputs and executing a marketing plan.

Loan decisions

Having thorough business discussions with lenders and partners in the current cycle is paramount. It will be important for operators to know their production costs and how they plan to manage their assets going forward.

Loan renewals will be happening even sooner this year, likely after harvest for those operators whose banks have identified as experiencing the most financial stress.

Carl Horne, program and outreach manager for Farm Credit Services of America’s Young & Beginning Program, says detailed business plans and cash-flow projections write a more positive narrative for lenders as they work with loan committees on your loan worthiness.

Margins might be tough for the next 12 to 18 months, but if you can project how you plan to return to profitability, it allows the lender to accurately access a producer’s competency and ability to execute on that plan, Horne says. 

Nate Franzen, president of ag banking at First Dakota National Bank, says the longer a borrower is losing money, the more pressure is put on a lender to downgrade that borrower’s rating. When clients become a higher risk, their interest rates, in turn, increase.

By showing multiple-year projections and when a return to profitability may be possible, a bank may be able to tolerate that amount of loss without having to downgrade the borrower’s risk rating.

“The more prepared you are with better-quality financial information, it helps the lender understand your situation and gain a higher level of confidence,” Franzen says.

Show lender your management strength

Do you manage finances well? If you can show your lender you do, it will help you stay on top in the tighter days ahead.

Franzen says the No. 1 thing banks look at when evaluating loan portfolios is one’s management ability to get through a down cycle. “Are you willing to make decisions and adjustments to cut expenses and try to increase your possibility of being profitable?” Franzen asks.

“Time is not your friend in a down cycle,” he says of the softening machinery and land market. Land values are softer, but still relatively strong. Used equipment values have seen a drop, so if selling, you probably already left some money on the table.

Making tough choices to generate revenue speaks loudly to lenders. Here are ways to better position yourself:
-renegotiate cash rental rates with landlords
-examine what you’re planting and if it pencils out
-evaluate capital expenditures
-restructure debt
-tighten belt on family living expenses
-add off-farm job or do custom work

“Being aggressive and proactive will tell your lender you are a good manager and can get through challenges better than others,” he concludes.