Finance First: How can grain farms be proactive in a downturn?

Finance First: How can grain farms be proactive in a downturn?

When it's time to consider changes for the farm, it's hard to know of the best place to start

I think our grain operation did a nice job acting on opportunities the past seven years or so. We grew from about 2,000 acres to 7,000. Now it feels like a whole new ballgame. We don't really know the best way to compete in this economic environment. It's been hard for us to make the right operational decisions. I think we need to consider some major changes. How do we start? — L.G., INDIANA

Are you prepared to make changes in your farm operation?

Many farmers are feeling the way you are and asking themselves similar questions. The key is quickly reacting and adjusting to new and different economic conditions. When times are good, operations like yours – which are able to scale and grow quickly – thrive in that fast-paced environment. And when things change, you need to shift your thinking.

I wonder which operations will be willing to make major decisions and sacrifices if needed. Which will wait until it may already be too late? Will they wait until their lender or someone else forces them to make a change?

Farm leaders with a proactive mindset during this time of lower margins will come through strong in the long run. Many farms have been in growth mode like yours in recent years. But some have already changed their thinking in order to adapt to the environment, so their farms can continue to survive and thrive.

These farms are proactively cutting costs, making tough management decisions and even scaling back if necessary. They minimize any losses by doing this now. They're going to be able to weather the storm better, for as long as they need to.

As you consider these decisions, you may need to think longer term. What do you want your farm to be like when the economic climate changes again? What decisions or changes do you need to make today for it to be that way?

The farm's leaders need to discuss this together and plan for changes.

Maintaining a banker-farmer relationship in a downturn >>

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I farm about 3,000 acres in my grain operation. We're doing all right financially. I don't think I have any reason to worry, but I want to make sure I maintain a positive relationship with my banker. Then, if this grain market downturn is prolonged, it should help keep our banking relationship secure. What are some tips for keeping the banker happy during a downturn? — J.S., MISSOURI

By working with your banker while your farm is doing fine financially, you're digging your well before you're thirsty.

First, bring your financial plans and projections to meetings. This does some of the groundwork for them. That's not to say that the bank won't convert it to its own format, or question any numbers, but it shows you've put your pencil to paper.

Next, talk with your banker about how the bank does risk ratings on its clients. It's advantageous to know how your operation is being rated, so you can work on those areas. What are the ratios they look at when they decide whether an operation is high or low risk? How does your bank value assets, such as land.

Ask your banker what he or she foresees coming down the pipe to affect the industry. Your banker may talk about new regulations the bank is facing. Knowing what the bank faces helps you better prepare.

Related: 4 tips for talking to your farm lender about financial trouble

Make two different projections each year — a realistic one based on the current economic environment and one for worst-case scenarios. Explain your contingency plans for each. Then you can gauge if you and your banker are on the same page. Ultimately, it should lead to a much deeper conversation.

Overall, make sure that your banker isn't surprised about what's happening in your operation. Check in periodically throughout the year to give updates. The proactive mindset you're taking is key to make these ideas work and strengthen your relationship with your banker.

Frye is president and CEO of Water Street Solutions. Email [email protected].

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