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Margin management: The lender’s role in farm business

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Discipline is going to be necessary to make it in 2022.

The big snowstorms this winter have wreaked havoc on my travel plans for face-to-face events. The ability to quickly pivot online has been a blessing in many of these instances. During a recent virtual event, a banker asked, “What is the role of the agricultural lender in an economic environment with low and possible negative margins?”

First, the lender’s role is not to develop the financials including the cash flow, balance sheet, and income statements for the customer. In this economic environment, the producer must have buy-in when developing and analyzing their financial statements. The lender can then provide guidance for information such as prices, costs, and values to develop the statements.

The role of the lender moves to the monitoring phase. Once per year drive-by financial analysis for tax management will not get it done in an environment of margin compression. At least quarterly or monthly examination of the financials side-by-side with the lender, accountant, or a financial consultant provides another set of eyes on the financials. In these situations, making midcourse changes in pricing, risk management, and cost management can improve the odds of a positive outcome.

This year, a disciplined approach to pricing and risk management will be critical. Line by line management of farm and personal budgets will determine whether cutting or actually increasing costs can be beneficial. Debt structure, terms, and interest rates will rise to a higher strategic level of importance in the future. After years of little changes in variable interest rates by the Federal Reserve, one can expect three to five increases of one quarter of one percent each.

Part of margin management will be an assessment of the working capital position. Lenders can provide the benchmarking data to do peer analysis, which can be invaluable for business strategy and actions. Get and stay liquid will be the call to order in a compressed margin environment. The burn rate on working capital, calculated by dividing working capital by losses, can be used to assess the ability to weather challenges in a difficult economic cycle.

Finally, do not expect your lender to give specific advice. This falls under the category of lender liability. A lender can provide alternatives, but it is up to you as an owner or stakeholder to make the decisions and be accountable for the subsequent actions and outcomes.

Source: David Kohlwhich is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. 

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