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Young beef producers might learn from grain farmers' pain

Young beef producers might learn from grain farmers' pain
Most analysts agree the downturn in grain commodities will someday be followed by a downturn in beef prices.

Grain farmers are feeling the pinch these days as prices are down and inputs remain relatively high.

Those most at risk may be younger farmers with higher debts. Many beef producers see themselves at the opposite end of the spectrum. But the lessons of today for grain farmers could be lessons for tomorrow for beef producers.

Virginia Tech economist Dave Kohl recently revealed to us the characteristics of young farmers at greatest risk as we enter the grain-price downturn.

For lack of a better title, we'll call it "Dave Kohl's Big Five" and it's a list you don't want to be on.

1. Some are heavily leveraged.

2. Some have low working capital.

Most analysts agree the downturn in grain commodities will someday be followed by a downturn in beef prices.

3. They may have a home-run attitude as far as aggressive cash rents and marketing – always shooting for the top.

4. They have high family living costs, which may include a high-maintenance spouse.

5. In some cases, they have lenders who are not tuned in to help turn that ship around as grain prices slip to unprofitable levels in 2015.

In some regards Kohl is describing the aggressive, growth-minded "go-go" farmer. Any one of those five characteristics might get you in deep financial trouble in the next few years.

Keep in mind lenders are also on the hook with regulators. They have to be sure their portfolio is strong, well-documented and transparent. That means producers are going to need to step up to the plate and work more openly with those lenders going forward.

Even if you're financially conservative with great business acumen, most likely bankers are going to need more information from you now.

"This idea of just going in and getting a loan based on your balance sheet or your character is not going to fly anymore," says Kohl. "What you need in the next 12 months is repayment capacity and liquidity."

You may need to figure your accrual adjusted income - what lenders call "true repayment capacity."

True working capital is what can be turned into cash to meet bills, to buy inputs and make payments, says Kohl. You need to know the lender's underwriting standards, which helps them determine risk.

Questions you need to begin formulating answers to are these:

• How much liquidity do you need?

• What is a good coverage ratio? Coverage ratio is a measure of a company's ability to meet its financial obligations. In broad terms, the higher the coverage ratio, the better the ability of the enterprise to repay its obligations to its lenders.

• What amount of working capital does the bank want?

Kohl says these are things to ask your banker, because these are the things farmers will need to know to get along in a tougher lending environment. Someday, when beef prices really fall off, and they will do so at some point, beef producers may face some of the same questions and issues.

Wilson is editor of Farm Futures magazine.

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