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Experts: Get your financial house in order

Your Farm Business

September 9, 2011
From Wayne Schoper and Rich Baumann , South Central College

From Wayne Schoper and Rich Baumann

South Central College

(The information in this article is from Shannon Linderoth, Associate Editor, Dairy Herd Network, updated: August 25, 2011. One of the newest buzzwords in agricultural lending is "protecting margins." This is not just price protection, but protecting the margin between your input costs and the price you receive for the commodities you produce. The better protection of your margin, the less risk for the loan. While this article pertains to dairy, it's basically true for other livestock and crop production as well.)

Long gone are the days of calling your banker or stopping in at his office for a five minute chat and gaining access to whatever credit you need to run your dairy business. Participants in Wednesday afternoon's "Protecting Your Profits" monthly conference call by the Center for Dairy Excellence learned that lenders are asking much more of their clients these days, especially when it comes to risk management and managing dairy margins.

On one hand, "Lenders really haven't changed their loan underwriting standards," Mike Hosterman, AgChoice Farm Credit agricultural business consultant explains. It may just seem that way.

What has changed is that lenders have become much less flexible about bending the rules and much more demanding of farm financial data.

"They want more information, more written plans," Hosterman says. "They want multi-year cash-flows, written contingency plans, budgets, farm liquidity goals, and general farm goals. They want written risk management plans.

"We're not just talking about price protection," he adds. "The goal of these risk management plans should be about margin protection, not just to achieve the highest possible price. And again, these need to be written plans that include action triggers and your overall strategy. Plus, these plans must be followed, not written up and then put in a drawer and forgotten.

That's because lenders want to be able to track performance, so if goals are missed, they can determine how close you came to meeting the targets. Or be able to adjust your plans and strategies as needed.

Given the choice between lending to a dairy with these written plans in hand that has slightly lower equity than another dairy that does not have written plans and goals, most lenders will offer the dairy with the written plans preferential treatment, Hosterman observes.

And lenders want to hear from you more often, whether you use risk management tools supplied by your co-op, a brokerage firm or livestock gross margin for dairy insurance program.

Speaking of livestock gross margin for dairy insurance, its federal budget status remains somewhat murky. "Expectations are that when it becomes available again in October, the funding will probably be used up in one month," says Alan Zepp, Center for Dairy Excellence risk management program coordinator. "So if you are planning to use this tool, talk to your crop insurance agent now so when details on the October sales period become available, you can act."



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