Ag Lending -Alternative Lending

Farmers are eternal optimists, and rightfully so. Raising a crop takes a lot of hope. Planting a seed in the ground, tending it for months — through sometimes impossibly challenging weather and environmental conditions — and expecting a bountiful crop takes both a diverse skillset as well as the right mentality. Optimism is almost a pre-requisite for being a successful farmer.

But when times are tight and markets strain revenue potential, this mentality sometimes can be harmful. Sure, times are a little tough today, but they’ll get better tomorrow, so I can put off making certain commitments or decisions until things are better in the near future, right? Wrong. In fact, there are some financial decisions you can make today that, if delayed — even out of a sense of optimism for the future — could wind up costing you.

Weathering a challenging marketplace like the one facing many grain and livestock producers today is essentially a matter of control. And that’s difficult to maintain amidst not just bearish markets but the volatility facing producers. The Ag Economy Barometer, a project bringing together Purdue University economists and the CME Group, surveys farmers and ag stakeholders each month to get a sense of overall market sentiment. In recent months, survey results have whipsawed up and down, and while it’s been partially as a result of events — like the news of Market Facilitation Program (MFP) payments or the ongoing trade war affecting ag markets itself — that fluctuation shows the anxiety of many producers in today’s volatile marketplace.

And it’s not just in agriculture. The CBOE Volatility IndexÒ (VIX) is essentially a 30-day rolling average of expected economic volatility based on the sentiments of financial market participants. The higher the VIX, the more volatility financial market participants expect in the next month. In recent months, the Ag Barometer and VIX have marched in lockstep together, showing there’s a lot of volatility in both the ag sector as well as the general financial markets, where a lot of farmers have investments.

Driving that volatility is the uncertainty that’s become common in agriculture in the last few years. Yes, it’s made it difficult to maintain the optimism with which many producers approach their businesses, but it’s also clarified a few steps they can take to help buffer against some of the volatility and uncertainty in today’s marketplace. There will always be things like Mother Nature that we can’t control in agriculture, but by taking five simple steps today, we can ramp up our control on things that can help us better weather the markets that continue to strain producers’ bottom lines.

  • Know your costs.

Many producers talk about “sharpening their pencils” in times of challenging markets, and it’s good advice. Knowing your costs — ranging from long-term costs like land mortgages to year-to-year costs like fertilizer and seed — gives you the right baseline from which to control more about your operation, making you better able to deal with overall marketplace volatility.

  • Build a solid marketing plan.

Once you know your costs, you can apply them to updated breakeven prices that will ultimately become the baseline for a new marketing plan. Having a good idea of crop production based on annual production history (APH) and the prices you are likely to receive for your grain can help you create a plan that’s realistic and meets your revenue needs — or comes as close to doing so as you can get in today’s marketplace. Then, it’s just a matter of creating the plan and sticking to it.

  • Be willing to adjust or negotiate.

If you’ve got a marketing plan in place but still anticipate unsustainable financial results, it may be time to make a structural change to put your operation on more solid footing. Talk to landowners and see if you can renegotiate your land rents or consider making adjustments to your machinery lineup to free up operating capital. Also consider making changes to personal living expenses. Though this can be tough, cutting back on these expenses can also free up much-needed capital to continue operating in the black.

  • Lock in long-term interest rates.

With farmers being such eternal optimists, this one can be difficult. Even when rates are low, the most optimistic farmers may pause before locking in interest rates on long-term financing because they anticipate lower rates in the future. But with so many other variables affecting your business, it’s best to lock in an interest rate so you know exactly what your interest costs will be for the duration of the financing. One of the crop inputs you can control is money, and by fixing your interest rate, you’re securing that component of your balance sheet from any potential dramatic change from continued marketplace volatility.

  • Block out the “noise.”

There is a lot of noise in agriculture right now. Whether it’s the latest report on the continued trade war or talk about the next farm bill and how it will influence marketing and risk management decisions, there is always a story that piques producers’ interest. In many cases, these types of stories — though legitimately affecting your market in the long run — tend to have very little impact on how you manage your operation today. Don’t let stories like these distract you from following your plan.

If you’re looking for a new financial partner in maintaining your optimism in today’s agricultural marketplace, Conterra Ag Capital has the expertise and industry relationships that can help keep your operation on solid footing. Contact us today to learn how we can work together to ensure a strong future for your operation.

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