A conversation with…Evan Hahn, Vice President of Credit, Farm Credit Mid-America
OCJ: There is growing concern for some farms with regard to securing enough loan funding to be able to plant a crop in 2016. What broad factors have contributed to this situation for some farms?
Evan: With the end of the commodity super-cycle, farmers are now faced with commodity prices less than half of what they were just two years ago. At the same time, inputs, equipment and land rents have not dropped as quickly as commodity prices. This has heightened the need for farmers to maintain an adequate working capital position to help them weather periods of adverse economic activity.
Farmers will need to proactively assess their financial position and determine if changes need to be made to their business model. If changes are necessary, I would encourage them to work with their lender to look at options and decide which ones may have the most beneficial impact for meeting both the short and long term goals of the farm.
OCJ: What is your take on the farm lending situation for 2016 and beyond?
Evan: This will be a challenging year for many farmers. Tighter margins will require farmers to closely examine each line item expense as well as capital needs, marketing and income strategies. This may well be the norm for a year or more, as producers adjust to lower prices and margins. The producers who are able to adjust quickly and in meaningful ways will be in a better position to handle continued adversity.
Many younger or beginning farmers have not experienced a period of time with tighter margins. At Farm Credit Mid-America, we have a program for young, beginning farmers to obtain credit, as we understand the challenges they face. The program focuses on providing young farmers with tools to help them improve management skills, financial training, business plans and peer networking. All of these learning tools are available to customers who participate in the program.
OCJ: What types of farm situations pose the highest risk of not being able to secure enough credit?
Evan: Farms without sufficient working capital will find themselves in a difficult spot, and they may find it necessary to operate entirely on borrowed funds. While that isn’t necessarily a bad decision, it does limit options for farmers as they do not have the cash to make operational decisions throughout the production year.
Other situations that cause concern are with those who cannot adjust their expenses or fixed costs quickly enough to avoid multiple years of true cash losses. While the recent past has resulted in tremendous earnings potential, we are now seeing farms that are experiencing significant year-over-year losses.
OCJ: What on-farm factors are important to you as a lender in formulating credit allocation decisions?
Evan: Management ability is an intangible that is always difficult to discern. However, management capabilities on the farm are crucial during times of economic stress. The ability of a farm manager to effectively incorporate risk mitigation strategies such as marketing plans, crop insurance, and the ability and willingness to adjust to the changing economic environment is vital to the success of the farm. This all starts with a deep understanding of their financial position, their risk appetite and the discipline to put together and follow a detailed plan to weather the current ag economic conditions.
OCJ: In these times of tight margins, what short-term advice do you offer the farmers you work with?
Evan: Be proactive in talking with your lender, don’t wait until the situation is in dire shape before having that conversation. Often, by having that conversation early in the process, there are multiple solutions that can be identified to provide relief to the farm. As time goes on and circumstances deteriorate, the options available may be fewer and more difficult to accept.
Step back and objectively scrutinize all aspects of your farm operation and determine capital and expenses that are absolutely necessary, those that are beneficial, and those that are not vitally important to the ongoing success of the farm.
OCJ: How does crop insurance fit into the mix?
Evan: Crop insurance should be a key risk mitigation strategy for every grain farmer. With tighter margins and lower commodity prices, I would highly encourage producers to seek out a qualified crop insurance agent that can tailor a policy to their needs. This is another tool available to farmers to help them mitigate risk and formulate their marketing plan.
OCJ: What are sound long-term strategies farms should employ for weathering tough financial storms?
Evan: Know your break-even cost of production and have a marketing plan developed that will enable you to lock in a profit. If you find that your break-even is below the current commodity price, analyze ways that you can improve your margins by cutting expenses, improving production or marketing more effectively.
Also, build and maintain a level of working capital that will enable you to weather periodic downturns in the ag economy. A minimum level of working capital we would expect to see is 20% of your gross farm income. During times of adversity, higher levels of working capital will provide a farm operation with more options.
OCJ: Relationships are important in securing credit. What steps should farmers take to develop better relationships with their lenders?
Evan: Be proactive in knowing and understanding where you stand with your lender. Find out what key financial ratios are important to them and update them annually at a minimum.
Additionally, set goals for your operation and share them with your lender. Knowing where you want to be three, five, or 10 years down the road will help your lender understand your operation and can then provide feedback in ways to help you achieve your goals.
OCJ: What is the toughest part of your job in all of this? I would guess tough lending decisions are no fun for anyone involved.
Evan: Working with customers during times of stress can be challenging. It is important to recognize that farming is not only their livelihood, but for many, it is a way of life. Treating customers with respect and being open, honest, transparent and realistic about issues is important. The lender cannot be all things to all customers at all times, but by being proactive, working together and treating each other with integrity we can oftentimes find workable solutions for both the farm and Farm Credit Mid-America. The rewarding part of the job is finding ways that we can work with our customers.