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‘Telling your ag story’ may also work with lenders

 

By Michele F. Mihaljevich

Indiana Correspondent

LOUISVILLE, Ky. — Farmers are taking out more loans as the agricultural economy struggles to rebound from low commodity prices and other factors, according to an official with Farm Credit Mid-America.

The company is seeing an increase in lending this year compared to last, said Steve Allard, executive vice president and chief credit officer. That correlates with national numbers showing a 5 percent increase in farm debt in the calendar year, he said. Farm Credit Mid-America serves nearly 100,000 customers in Indiana, Kentucky, Ohio and Tennessee.

Allard listed three reasons for the increase in farm loans. “As we’ve been in the cycle of low commodity prices, some operations have been working out of pocket,” he explained. “They have lower working capital and are taking out loans, some for the first time.

“They’ve also been increasing the size of their operations. Maybe their neighbor is getting out of farming so they’re making a land purchase. That often takes working capital.”

Some farmers are taking equity out of an existing operation, possibly to pay off a short-term loan, he added.

Ben Brown, program manager for the Farm Management Program at The Ohio State University College of Food, Agricultural and Environmental Sciences, said the statistics he’s seen also indicate an increase in the number of loans and the collective size of those loans.

“Some loans are for working capital and some are used to buy fixed assets like land, machinery or cattle,” he noted. “As the price of land and machinery has increased, it has increased the probability that a farmer will need a loan to finance the operation.

“Farm income has come down roughly half from what it was at the peak in 2013, at $129 billion. Lower net incomes have in some individual cases decreased net worth and assets. The debt-to-asset ratio has been increasing, but is still well below the levels of the 1980s.”

Shawn W. Dutton, CEO of First Security Bank of Roundup, Mont., said his institution’s loan demand has increased a little this year. “That is being driven by a dry summer in 2017 that reduced crop production, followed by a very long, snowy winter that greatly increased feed consumption for the cattle producers,” he explained. “As a result, hay costs and hay needs were both high, causing higher operating loan requests.”

Matt Puchbauer, president and CEO of Peoples Bank of Altenburg, Mo., is seeing fewer loans. “Low commodity prices have narrowed profits and tightened cash flows,” he noted. “Farmers are presently delaying farm equipment upgrades until greatly needed.”

Tariffs imposed or threatened on countries such as Canada, China and Mexico that purchase agricultural commodities from the United States could impact farm loans, Allard noted.

“Prior to the tariffs, it looked reasonable that 2018 was likely the bottom of the (agricultural economy) trough. We thought we would see the curve in earnings improve. (Tariffs) have changed the landscape today. This changed in 90 days. There’s so much volatility today.”

He said it’s not beyond belief that 2019 could be more challenging than the last few years, though he said given the volatility, things could look quite different by the end of the year. In addition to tariffs, strong corn and soybean crops could impact prices, Allard said.

Tips for loan approval

As for those seeking a loan, he pointed out lenders will look closely at cash flow when deciding whether to approve it. “Lenders want loans repaid from earnings,” Allard said. “It can be more challenging to meet lenders’ underwriting standards.”

Brown said the fact that farm loans have increased may indicate they aren’t more difficult to get. “This is probably on a case-by-case basis,” he said. “It really depends on the size of the loan, the financial position of the farmer and the risk preference of the bank. Operations with a low debt-to-owners’ equity would probably not have a difficult time receiving a loan.”

Ohio averages 1.23 bankruptcies per 10,000 farms, below the national average of 2.33 per 10,000, he said, citing data from the Farm Income Enhancement Center. Delinquency rates have dropped over the last two decades. Brown was hesitant to say that indicates banks are giving out less risky loans, since the total number of loans is up.

Mark Scanlan, senior vice president of Agriculture and Rural Policy for the Independent Community Bankers of America (ICBA), said farmers who are credit-worthy and can show the ability to repay their loans are not having problems accessing credit.

“But cash flows have tightened for many farmers, and those producers may have to tighten budgets or restructure loans to ensure access to credit,” he added. “Community banks go out of their way to continue to work with customers.

“However, there has been a spike in demand for guaranteed farm loans in recent years, and that is why as an association, ICBA has pushed for an increase in loan limits and more funding for these programs that allow banks to work with customers who would otherwise not be able to access commercial credit.”

Farmers seeking a loan should have their financial information such as a balance sheet and earnings statement ready when going to talk with a lender, Allard advised. This is especially true for those taking out a loan for the first time. Producers should also be willing to share information on their operation and goals, he added.

“Just be prepared to tell your story – what you do, how you do it, how you manage the farm and operation,” Allard suggested. “That’s often more valuable than financial information.”

A good credit score and strong cash flow are important when seeking a loan, Brown said. Ohio State hasn’t done a study, he noted, but farmers who have and use grain marketing plans and those who include their banker in their crop insurance conversations have the potential to guarantee revenue to their banker through federally backed programs.

Scanlan also stressed the need to have financial records in order when meeting with lenders: “Having detailed marketing plans and business plans that realistically project profitable operations in future years are important. Crop insurance is also essential.”

Lenders are impressed if farmers have a marketing plan to sell their crops, Puchbauer said. It’s also helpful if customers have a longer-term strategic plan for their operation.

“Bankers hate surprises, so make sure you keep your lender informed even if it is bad news,” Dutton noted. “When looking for a new lender, make sure you have a detailed plan and budget that shows you know the business and why you will succeed when others are struggling.”

Challenges for new, younger farmers

Allard said he’s seen a mix of older and younger farmers looking for loans. “But farmers who may have operated out of pocket, they’ve generally been in business for a while and were making a profit.

“If you’re a new or young farmer, it is more challenging to take out a loan. In Indiana, with profits as challenged as they are for the state’s primary commodities, it is tough to build equity and build working capital.”

Young farmers and ranchers are most likely to take out a loan and that probability has increased, Brown said. “That probably isn’t too surprising, as land and machinery aren’t cheap. The number of first-time loan recipients is almost all going to be young or beginning farmers. I’m going to guess for most farmers, this isn’t their first loan.”

Several states are piloting projects to encourage access to credit for beginning, young and disadvantaged farmers, but it’s too early to tell if those programs are working, he noted. “Young and beginning farmers struggle to access credit and that has been a priority for legislators for years. The problem is, no one really knows what to do or what works.”

The outlook for farm income starting next year – including a resolved trade dispute with international trading partners – is for higher commodity prices and farm incomes, Brown said.

“This will be a positive for access to loans, as farmers will have stronger cash flow. A strong outlook for farm incomes could encourage machinery and land purchases along with access to more credit at banks,” he explained.

8/16/2018