Agronomy Educator Jeff Graybill, with Lancaster’s Penn State Extension, thought because of suppressed milk prices, a good first topic for Lancaster County’s Crop Conference should center on managing farm finances. Darin Miller, regional lending manager with MidAtlantic Farm Credit, did the honors. The farm credit system has actually been in existence for 100 years as of last summer. “Like all of you, Farm Credit has felt the pinching Ag economy,” Miller said; “we’ve been experiencing lower margins for the past 12 to 18 months.” Farmers have not been as profitable as they’d like to be due to the carryover from 2014.
Moving to corn, “We’re not looking at any large expansion in corn prices in the near future,” Miller continued. “This could change drastically based upon predicted weather patterns, but we’re not looking at $6 corn by the middle of the year.” Miller said this was merely “the acreage reported and projected acreage for 2015 and 2016 -17 that would indicate a significant bump in corn prices.” Same with soybean prices, he said. For those in or around the dairy industry, Miller reminded them dairy operates in a cyclical fashion. “Every three or four years, we have a new dairy cycle. How do we prepare ourselves for the next one? I mean, we know we are going to come out of this cycle; how long it’s going to be is uncertain.”
Farmers really start to look at numbers and cutting costs and profit margins when prices go down. They begin to manage their money and really plan for their operation at that point. “My personal opinion is that it’s how you handle the cash flow — your excess cash flow — when commodity prices are high that dictates how you are able to perform when commodity prices are low,” Miller added. “We can get sloppy when prices are high, and I think that’s when it takes the most management because having that cash, and having spent money in key areas that will improve the efficiency of your operation, is what gets you through the downturn in the Ag cycle.”
Farm Credit was set up in 1916 to finance agriculture at a time when there was not a large market for agricultural financing across the U.S. It is mandated to lend to farmers in good times as well as bad. “That’s basically our whole approach to agriculture,” Miller stressed. “It isn’t something where we turn the spigot off and on as dairy prices and commodity prices go up and down.” Miller also advised farmers to communicate often with their lenders. For example, Miller cited a case where Farm Credit gets a phone call from a farmer whose payment is due in two days. “They say ‘hey, I’m not going to be able to make my payment.’ This is a tough position for us to be in. We have a lot more options if we are kept up to date and we are informed of where your operation is going, and what pitfalls you might see in the future. We have a lot more of those options when you are current and we have some time to come up with ideas.” Therefore, let the lender know where you see yourself being short on cash and what difficulties crop up in making payments. Make your concerns relative. “You might have some hesitation in doing that,” Miller acknowledged. “You don’t want to indicate to your lender that you are not in good financial shape, but your lender would rather hear three months out that ‘hey, I’m going to need some money for my inputs in the spring’ than for you to call in April and say that you’re ‘delivering corn seed tomorrow and I need money.’ At that point our options start to get limited.”
More opportunities exist before there’s a crisis, and being proactive and restructuring things ahead of time can change the dynamics of the entire operation. When milk prices are high and when grain prices are high, planning and budgeting then can help you to decide what capital expenditures are necessary, which ones will improve efficiency, and where you might want to put your money. If you spend your money unwisely, on things that do not improve efficiency or that are done purely to avoid taxes, you might look back two years later and ask “where did all that cash go? What are my options now?”
“Don’t be afraid to go to your lender with ideas,” Miller counseled. “Don’t feel that you can only go to him with a problem. You know your operation better than we do: the ins and outs, what it costs to put an acre of corn out, what it costs to produce a hundredweight of milk. For our part, we know the financial side. When you come up with ideas to bridge the gaps it also involves projecting how long commodity prices are going to last. Being able to look at your operation and being able to say ‘what if milk stays down for the next six months, 12 months, 18 months’, then developing a plan and coming to the lender with that plan can be a tremendous help.”
Miller turned to another option — providing a new term loan. “This reimburses cash that provides working capital. There were a lot of cash purchases made in 2014 and the years before, cash purchases of equipment and stuff we would typically finance for a short period of time. We can take a look at reimbursing you for some of that cash and terming out a portion of whatever that asset is.” This is a good option when cash is what you really need. It is cash for input purchases or different things you are going to get more than one time a year.