Cash flow is king
A positive balance sheet requires persistence, bankers say
The past couple of years have been tough on the balance sheets for many farmers and ranchers in the High Plains region, and their bankers also feel the impact. Staying on the positive side takes good management skills.
The macro perspective shows that farm income for 2019 is down more than $40 billion from 2013’s record high of $136.5 billion. Toss in micro problems such as untimely weather patterns and trade wars and it was a recipe for a tough year. As bankers look to 2020 there are some hopeful signs, but they also say any turnaround in the farm economy will take time. As a result, keeping a positive cash flow requires vigilant management.
Jeff Torluemke, a northwest Kansas producer, understands the pressure as he has an extensive background in agricultural lending with over 38 years involvement in commercial banking. He has managed portfolios up to $80 million with his concentration on agricultural lending. Torluemke is also the operator of a 9,500-acre farm and owns, rents and performs custom farm work on irrigated and dryland in Sheridan and Decatur counties.
“It is hard to name just one thing that would be the most challenging and most are not unique to 2020. They are typically challenges that face agricultural producers every year—input expenses, tariffs and trade issues, always the weather, over production. What is getting the most press at this time is the trade deal with China,” the Hoxie farmer said. “This makes it so hard to market because people will be worried about missing out on a significant rally and miss opportunities to make a profit. Waiting for that last nickel can end up costing a dollar. A lot of producers forget to set marketing goals and act on them—we wait for the high instead of averaging in on price rallies.
“I always told my customers in the bank that marketing is the hardest part of farming. The technology available today has evened the playing field for those who take advantage of it. If we could get ‘something’ to help with marketing the way production has improved, it would be the biggest benefit to production agriculture I can think of.”
Cloudy crystal ball
Ernie Goss, a professor of economics at Creighton University’s College of Business and the Jack A. MacAllister Chair in Regional Economics, Omaha, Nebraska, studies rural economics. He said the 2019 estimated net farm income of $92.5 billion was about $8 billion higher than 2018’s figures because of a boost from the Market Facilitation Program payments that were made available from the U.S. Department of Agriculture because of the ongoing trade war.
“Agricultural commodity prices are still too low for farmers to really thrive,” Goss said. “And, of course, farm debt is really a huge hurdle right now.”
A silver lining has been farmland prices have remained steady.
Larry Winum, CEO at Glenwood State Bank, Glenwood, Iowa, a $220 million institution with operations in Tabor and Council Bluffs, has been involved in banking since 1987 and said over the past three to four years low commodity prices have been the biggest challenge to the farm economy.
Grain prices remained relatively high until about four years ago, but the falloff certainly is below what producers need to grow their operations in the long term, Winum said.
“Farmers have done a really good job of managing and they have cut back on expenses,” he said.
In southwest Iowa, added challenges included a late winter storm, heavy rains and a flood that for some farmers in his region meant spring crops could not be planted in spring 2019, Winum said. The resulting floods in some cases will mean some acreage will also not be planted in 2020.
Also, in Pacific Junction, a community with about 200 homes, every single house was under water and that was total devastation. For grain producers, the 2018 farm bill, which was prudently approved by Congress in late 2018, did provide producers with known crop programs, which allowed for better financial planning, Winum said.
The Risk Management Agency’s assistance in paying prevented planting claims was very helpful to the producers who were unable to plant, he said. Additional disaster relief also helped from the USDA.
In Hope, Kansas, First National Bank President Dan Coup said the story of 2019 was weather related, a carryover from 2018 when weather slowed the fall harvest and wheat acres could not be planted. Farmers filed prevented planting claims, Coup said, which helped their bottom lines. Then a wet spring kept farmers from planting corn, soybeans and sorghum in 2019.
Winum and Coup both said customers have faced some stress but most have weathered the barrage of limited export markets and Mother Nature’s volleys. The relationship bankers have with their customers is essential regardless of the economic times, Goss said.
“It’s still good,” Goss said of today’s banker-farmer relationship. “What many bankers have done is restructure loans so their farm customers do not default. That’s what we’re seeing across the region.”
As an example some loans that were five years in length have been restructured to 10 years, he said, adding the restructuring terms vary depending on circumstances.
Torluemke said communication is paramount in the banker-customer relationship. Bankers understand that customers try their best and still failure can occur. Bankers also have an obligation to be specific and clear what they expect from their borrowers.
As an agricultural lender with an operation himself, Torluemke gained insight from successful producers and also learned why others did not fare as well. The difference most of the time is management, he said, whether it is doing the farm work in a timely manner or being disciplined to stay up on record keeping and financial bookkeeping.
As it is in any business, management is the key to success. The better the producer manages his time, the better his records are, the harder he will work and the greater success he will likely enjoy.
Perspective helps
Many farm customers have been through difficult times, most notably those who were in business during the 1980s when high interest rates fueled the farm crisis, Winum said. “They’re in much better shape than they were back then. They’re not as leveraged, at least in terms of their real estate debt, so cash flow is more manageable even at these prices,” Winum said.
“They’re certainly not making the kind of profit they’d like, but they have worked hard to cut expenses. They may not go out and buy a bunch of new equipment, but they are still getting along OK. They are coming in every year with their updated financial statements, and most of them are cleaning up their operating loans. So they’re making it work. However, they don’t necessarily have a whole lot to show for it when they’re all done.”
Coup said in the early 1980s borrowing at 18% rate led to a rapid decline in equity.
“We haven’t seen the dramatic crop in real estate values like we did in the 1980s,” Coup said, adding he has noticed the prolonged current downturn has been felt. “The better quality land is holding its value. The poor quality has taken a larger hit. It’s going to take time to work through this cycle.”
Agriculture is a business that goes through cycles, whether it is a glut in crops or working through some of the nuances of cattle herd expansions, the bankers said.
The farmers who are more leveraged who may take more real estate debt or were cash renting when grain prices were higher have felt more of the pinch, Winum said. Those farmers are the candidates for him to want to have details on their plan. Those who have enjoyed good years previously may see their payment schedules reworked to better reflect cash flow.
Torluemke said downward pressure is nothing new.
When producers had the big run-up in prices as a result of the ethanol boom, input expenses also reached a new plateau.
“When prices fell over 50% those inputs didn’t follow suit,” the northwest Kansas producer said. “The weather is obviously an issue every year. Too much rain, not enough rain, global warming and on and on. The weather is the one variable that has more effect on production and we have no control over it. In far western Kansas we have more and bigger piles of grain on the ground than I can ever remember, I know production in all areas of the country has not been as robust, but year after year the American farmer typically produces themselves out of a job. In commodity businesses the tendency is to over produce.”
All of these issues are not unique to 2020 and are always lurking even in good times, he said.
Mother Nature’s drag
Experienced bankers understand there are events, such as weather-related disasters, a producer or a banker does not have any control over, Coup said. “You just have to deal with it. There isn’t any magic formula. What we try to do is help figure things out. When it looks like we’re not going to get crops planted in a timely manner than we look at what are our options and can hopefully find a profitable one.”
He looks for customers who are planning ahead, noting it all starts with good financial records, Coup said.
“You have to know your breakeven,” he said. “When an opportunity presents itself then you can take advantage of it.”
Strategies include hedging, particularly for cattle, are highly recommended, Coup said. In First National’s $88 million bank, which includes operations in Herington and Miltonvale, a rancher has to consider a right time to buy and sell calves.
For grain producers, crop insurance and enrolling in farm programs can help reduce risk.
“You don’t want to lose any more than you can afford,” Coup said. “Control your expenses. Spend your money where you can get the most return.”
A year ago wheat farmers sprayed fungicide on their crop and that boosted their yields, which improved their bottom line even though price per bushel lagged, he said.
Caution reigns
Bankers in Goss’ survey are cautious in their comments in his survey.
The ripple impact is felt on farm equipment dealers and suppliers on main streets, the bankers said. Producers have been delaying new equipment purchases and they are focused on buying replacement parts and making do with what they have.
It’s nothing like the 1980s but there is real concern about the farm economy, Goss said.
Winum said first, the downturn in prices followed by a sustained period of flat prices. “Farmers’ balance sheets look a lot stronger today than it did back then. They aren’t anywhere as leveraged as they were then and that’s to their credit because I think they learned from the 1980s. We all did.”
At that time farmers were dealing with high interest rates and a drastic downturn in land prices, which dramatically eroded equity, he said.
“The farming industry as a whole has been more conservative during this current down cycle and I think a large majority learned from the past, and as a result saved money from the higher grain price period several years ago, which helped them through this period. I don’t think anyone anticipated that grain prices would be down this long but I didn’t anticipate that interest rates would be down like they have for the past 10 years.”
The trade wars have dampened optimism and perhaps as those wars get resolved or their impact is lessened, that could reduce uncertainty, Goss said.
Coup said the trade wars probably shaved $1 a bushel for wheat and $2 a bushel for soybeans. Plus, agricultural commodities are also a worldwide market and farmers in the middle of America have to keep tabs of production that occurs in South America and Russia.
A silver lining is that producers who have been able to harvest good crops were able to see above-average yields, he said. For example, if the projected breakeven is 40 bushels per acre for wheat at $5 a bushel but the yield is significantly higher, then the increased production makes it possible to be profitable.
“We’ve been fortunate to have above-average yields in our area the past couple of years,” Coup said.
As he looks to 2020, there are reasons for optimism, which include the U.S.-Mexico-Canada agreement moving ahead and easing tensions with China, which will help with agricultural exports, Coup said, plus cattle markets appear poised for growth.
The key to stability for rural bankers and their customers, Coup said, is to have an outlook of, “If you can get by the downtimes you’ll be all right.”
Torluemke said farmers and ranchers should stay aware of where they are financially at times. He personally uses a dashboard spreadsheet that allows him to keep track of where he is during the year versus where he projected.
“I like to see a rolling 16-month cash flow projection,” he said. “That way it is always current. As a month rolls off the front of the cash flow and that same month, 16 months into the future, rolls on. If this becomes too arduous, this can be simplified by doing a cash flow on a five-quarter format instead of a monthly basis.”
He likes that format because farming and ranching are businesses that don’t start and stop at any specific time during the year. He urges producers to be familiar with basic farm financial ratios that focus on solvency, liquidity and repayment analysis as well as financial efficiency. He added that while yields are important and dominate coffee shop conversations, producers would be better off talking about how many dollars an acre they have in the bank at the end of the year.
Producers should not hire someone else to do the bookkeeping if all they were going to do is review it once or twice a year, he said.
“Knowing where they are financially is just as crucial to the success of their operation,” he said.
Coup said having good, up-to-date financial records and having a realistic expectation with a workable margin is advantageous. Winum said banking and farming share a common bond and developing a strong relationship over time is crucial regardless of the farm economy—a philosophy that is shared by all loan officers in the bank.
“We do all we can to work with them even when times are difficult,” Winum said. “There’s certain financial information we require from them each year and I think they understand and appreciate the fact that our primary goal is to help them be successful.”
Finding ways to cut production expenses is more available with online searches, Torluemke said.
Market diversity
Torluemke, who was involved in agricultural lending in banks in Hoxie and Colby, Kansas, believes value-added market opportunities help grow market diversity. One of those projects has been recognized as one of the most successful ethanol plants in the country—Western Plains Energy in Oakley, Kansas.
Finding niche markets can help producers, he said, but it takes extensive research.
Smaller farms with limited acres are trying to get the most revenue from their acreage. In northwest Kansas, there are fewer producers farming more and more acres.
“Looking back, our area has had sugar beets, pinto beans, peas, sunflowers and now hemp,” he said. “Other things that people have developed are hunting rights and guiding services. A local dairy has developed a relationship with an international company to provided that company with partially dehydrated milk for Greek Yogurt. All are considered non-traditional or niche markets.”
Developing these niche markets can require an inordinate amount of risk, Torluemke said. “With these risks come rewards, however, just be sure that you don’t risk any more than you can stand to lose.”
Dave Bergmeier can be reached at 620-227-1822 or [email protected].
