Anticipate and provide for ag business cycle
Agriculture is the only business with more cycles than a motorcycle dealership. Farming is a constant cycle of good years and down years. One of the keys to survival and success is sound underwriting during economic hardships.
Agriculture is looking up financially for nut and dairy producers, according to Jerred Davis, Conterra Ag Capital relationship manager in California. The positive change from recent years gives producers time to breathe a sigh of relief and plan ahead for future potential downturns.
When agricultural borrowers experience financial difficulties, FDIC encourages financial institutions to work constructively with borrowers to strengthen credit and mitigate loss. Here are five ways producers can plan today for tomorrow’s downturn:
1. Add new sources of revenue
Putting all your eggs in one basket is never a good idea. The key with adding new sources of income is to diversify the operation’s revenue stream. While the obvious strategy might be to add a new crop with less market volatility, there are other considerations.
What about expanding into custom harvesting? That allows putting more productive hours on existing equipment. Along the same lines, consider leveraging that equipment across other cropping areas on your own land. In short, look for niches with less plunging lows in downturns and more consistent income in the good times.
2. Manage expenses
When it comes to handling expenses, always look at the bottom line. This means taking a close look at everything from the smallest variable expense to the largest fixed costs.
“Bare-bones the budget to maximize revenue,” Davis tells producers. This might start with a close examination of whether a potential new piece of equipment is worth the price. Or, can the life of existing machinery be extended over a couple more seasons without incurring devastating repair and maintenance costs? There is no one right answer. However, a strategy based on the bottom line will make it much easier to survive lean times.
3. Build strong liquidity
Strong liquidity often is the result of well-managed expenses. Building an operation’s liquidity might mean selling a low-producing piece of land or culling tail-enders from a herd.
“If it is holding you back, don’t be afraid to liquidate it,” Davis says. If nothing else, liquidating underperforming assets will improve an operation’s cash position.
4. Consider refinancing
Check loan rates and terms. Refinancing does not automatically mean you will save money in the long run. While there may be a strong business case to reduce interest rates, increase liquidity or ease repayment capacity during downturns, any refinancing should meet a specific business objective.
It is key to have a stated end-goal before moving to refinance. Be sure the refinancing fits within your own ability to handle debt. “Consider the debt you’re refinancing and evaluate the repayment progress, overall terms and your risk tolerance,” he suggests.
5. Choose the right lender
Look for an experienced, empathetic and understanding ag lender who understands farming and ranching. Part of that equation is working with a lender who has been through agriculture’s downturns and times of economic stress and still is eager to partner with farmers for the long haul.
Seek out an ag lender who is happy to answer the phone regardless of where in the cycle agriculture finds itself. Conterra Ag Capital’s loan products are designed to support farmers and ranchers through all the cycles of agriculture.