by David Cuddy - Loan Officer, Farm Credit of the Virginias, ACA (Abingdon, VA)
The past few months have seen record income if not record profits for most beef cattle producers in our region and around the country. Cow/calf producers in particular have seen income skyrocket as feeder cattle prices are at all-time highs, and with the futures market looking strong into the foreseeable future, it may seem that we should all just adopt a “let the good times roll” mentality. If you are a stocker operator, though, you may not be feeling quite as excited. While cattle that were bought right last year made good profits in 2011, the cost of cattle going back onto grass this winter have been much higher than we’re used to, and based on the futures and outlook predictions for the spring, it looks like putting calves on grass this year is going to be a very expensive proposition.
The reality is that all producers, regardless of which sector they fall into are dealing with ever increasing costs, more dollars flowing through the operation and, although gross income remains historically very high, the level of risk that most producers are dealing with is greater than ever before. Higher prices in all segments of the meat complex and supporting industries have resulted in one thing: volatility. While the opportunity is there to capitalize and make very good money during this time of record prices, the risk level to both producers and lenders has gone up tremendously as well.
Now is an excellent time to evaluate your relationship with your lender to make sure that you are prepared for the ups and downs of the markets and to make sure that you are both on the same page and prepared to handle any situation that may arise.
If you’re like most folks, you don’t like to have to borrow money to begin with, and you definitely don’t like having to answer all those questions about your operation and your personal business. But as prices for both cattle and inputs continue to rise, your lender may be one of the most valued and underutilized relationships you have. A good lender can help you get through lean times and position you to take advantage of opportunities that may present themselves. Let’s take a few minutes and look at the components of a good farmer/lender relationship, what a lender looks for and why, and some things that you can do to make sure you’re working with the right person, and that you’ve got access to the financing you need when you need it.
Identifying the right lender for you. Finding the right lender can be a lot like finding the right doctor. Any doctor can write a prescription, but it takes the right fit between doctor and patient to really manage your health and get the best out of the relationship. The same goes for lenders. While all lenders are in business to make loans, not all are the same. It’s important that you work with someone that you can identify with and that can relate to you and your operation. They need to understand your goals, both for your farm and your life in general, and be invested in helping you achieve them.
A good lender is not a “yes” man. You may not always get the answer you want. A good lender is not afraid to say no, or to offer constructive insight into how a plan might be changed to reduce risk or improve the chances of success. It’s important to remember that you are both on the same team. Often, in situations where a deal won’t work for a lender, it can quickly escalate into an adversarial situation. But with cooler heads, and an understanding that you are both working toward the common goal of your success, these situations can often be molded into an opportunity for the two of you to work together for a better outcome that might have been achieved if he or she had just gone along with your original plan.
A good lender-farmer fit means that the lender understands your business in terms of what your personal goals for you and your family are and from the business side as well. Good agricultural lenders are unfortunately becoming harder to find as many banks shy away from commercial ag lending, and as fewer college graduates have a farming background. While you don’t have to be working with someone that is running a business like yours on the side, it’s important that you make sure you are working with someone who understands the markets, the risks, and the rewards that you will face from year to year. While many lenders will jump on the band wagon and get into the ag market with both feet when times are good, it is no help to you if they bail out at the first sign of trouble. Building a successful relationship with a lender means finding someone that will stick with you in good times and bad. That may mean that you are willing to take “no” for an answer from someone who truly understands the business and trust them on it. It may even mean paying a little more in interest during good times so that you know that you’ve got a reliable partner when times are tough. Many lenders who jump into ag lending during good times will offer very low teaser rates to entice your business, and while saving a dollar or two on interest is important, it is far more important that you have a lender that’s willing to ride out the bumps with you, and that understands your business well enough to actually be a partner with you and is as invested in your success as you are.
Components of a good farmer-lender relationship. While there are many things that go into developing and maintaining a relationship with the lender you’ve chosen based on the factors above, the most important, by far, is communication. Without open and honest communication, a lender cannot provide the input and support that you may need during difficult times. While none of us likes to admit that things may not be going as well as we’d like, your lender may be the one person that can help you right a sinking ship or head off a disaster before it arises.
Accurate and timely financial information is crucial if your lender is going to be able to provide top-notch service to you. Make it a habit of preparing regular financial statements including accurate cattle numbers and feed inventory. The better job you do keeping records, the better job he or she can do of making sure they are providing you with the best possible loan package to keep you profitable.
Don’t hold out because you’re afraid of taxes. One of the biggest things I hear from borrowers is, “I made a lot more than that, but I’m not paying taxes on it”. Believe me, I understand that. Just remember that if a lender can’t find a record of a dollar made, you did not make it. We all have someone to answer to. For you, it may be Uncle Sam (or your spouse), but lenders have auditors and regulators that routinely check files for accuracy and credit quality, and no lender can get away with taking a borrower’s word for unaccounted-for income for very long.
This leads me to another key point. Lending, like all business, has changed. Five years ago, you may have renewed your line of credit with a phone call and a hand shake. You may have been doing it that way for thirty years, and now all of a sudden you’re being asked to verify everything down to your shoe size. Remember that just as the rest of the world changes, so does the lending business. The fact that you are being asked for this information may not mean that your lender trusts you any less, it just means they are required to do more today than they were a few years ago in terms of collecting information and verifying that it is accurate. Times are changing and, like it or not, we must learn to adapt.
Make sure that your accountant understands the information that your lender needs and is willing to provide it. Especially if you have a larger account, making sure your accountant and your lender have a working relationship is very important. If you really want to make your lender happy, just have your accountant automatically send copies of your income taxes to the lender each year when you file. That way, you know you have provided the information he or she will need, and then you don’t have to go around and around playing referee between the lender and accountant to get it done later.
Finally, make sure that your lender understands your operation. Every farm and every operation, just like every cow, is a little different. A good lender wants to get to know his or her clients and how they work. Invite them to come out to the farm. If they’re afraid to get dirty, you might need to refer back to the “fit” section of this article. Let them look at your cows, your equipment, your facilities. The better they understand you and your operation, the better job they will do for you.
Getting inside the lender’s mind. Now, I have to admit, that this is a little scary, even for me. Have you ever wondered, though, why the heck they need all that information? I want to take just a few lines and outline some of the processes that a lender uses in making a credit decision. Let’s start with the five C’s of Credit.
There are five major criteria that almost all lenders use when determining credit worthiness of an account. The first of these is Character. This characteristic helps the lender to determine your willingness to pay. It does not relate so much to ability, but the trust factor that you will follow through on your obligations. That’s where getting to know you is important to him or her. Lenders can use personal knowledge in this factor. Your credit score is also a key factor that most lenders use to quantify this trait. If you don’t pay your bills on time, or you have collections or other issues with your credit, it is a reflection of your character and your overall willingness to pay.
The second of the five C’s is Capacity. This refers to your ability to pay your debt. It is important that the lender have accurate and current information about your financial condition and recent profit and loss information (e.g. accurate tax returns) to develop this quantity.
Thirdly, the lender will look at Capital. This can be described as your net worth. How much do you owe in relation to what you own? Another key component within this trait is how much of your net worth is “liquid” or “near liquid”. How much money could you get your hands on quickly if you needed to? This calculation (back to overall net worth), is scary for many lenders right now. Land values are very much in flux. Livestock values have skyrocketed. It’s difficult right now as a lender, to determine a “true” value for these types of assets if things get tough. That makes it even more important for a lender to be familiar with your individual operation, both in terms of your livestock or other “chattel” assets, and your real estate and fixtures.
Fourth on the list is Collateral. Many lenders are asking for collateral now where they may not have in the past. This goes back to the statement above in regards to the huge increases we’ve seen in values of both real estate and other types of collateral. Lenders may be asking for additional collateral on loans or may be asking for collateral for the first time on an account. Keep in mind that this does not necessarily mean they are concerned about your willingness to pay or your management ability. It is the only real means of protection that a lender has from the potential for loss, and like many things right now, changes in requirements and regulations in this area mean that you may see your lender doing things a little differently than they have in the past.
Finally, the lender will look at the Conditions of the market and factors affecting the markets to help determine overall risk to the industry and how that relates to you and your request. Again, it’s important to have a lender that understands you and the business you are in so that they can adequately quantify the level of risk for both of you. Good decisions are based on good information and bad decisions… well, you get the picture.
Success in life depends in large part on relationships. Successful people surround themselves with people who will help promote their success. In this way, you end up with a symbiotic relationship where everyone benefits. Working with a lender is no different. Your profits may be looking great right now, and while the future looks bright for the meat complex, and in particular the beef segment, there will be tougher times down the road. One thing is certain in life, and especially in farming: the good times never last as long or feel as good as the bad times last or hurt. Now is the time to make sure you and your lender are on the same team. By building a solid relationship during the good times, you will have a friend and partner to help you get through the lean times.
David is a loan officer in the Abingdon Branch of Farm Credit of the Virginias and can be reached at 276-628-5191 or dcuddy@agfirst.com
