By Kindra Gordon

With the April 15 tax deadline looming, record-keeping and number crunching are likely getting last-minute attention from many. But, in today’s marketplace of tightening margins and increasing farm bankruptcies, particularly across the Upper Midwest, record-keeping deserves closer attention year-round. Consider that an analysis from the Federal Reserve Bank of Minneapolis reported that 84 farms filed for Chapter 12 bankruptcy in Wisconsin, Minnesota, Montana and the Dakotas between June 2017 and June 2018. While a large number of those bankruptcies were dairy farms, the trend is still more than double the number of farm bankruptcies reported five years earlier.

And, banks are also seeing more farm borrowers fall behind on their payments, with several analysts projecting the worst is likely still to come as ag price levels – and projected outlooks for corn, soybeans dairy and beef – remain low.

While many may want to ignore this downward trend and simply keep working hard at production, financial experts advise the best tactic is for producers is to get their financial house in order, which ultimately allows for making better decisions toward a profitable, successful, and sustainable operation.


Tactics to consider

Ag lenders suggest these strategies to combat financial stressors:

• Evaluate what a shock to your operation would do to your income, expenses or production. Utilize scenario planning to as “what if” questions, then brainstorm solutions to those scenarios.

• Don’t guess. Record-keeping and tracking financials isn’t what brought most producers to production agriculture, but it is a task that is becoming much more important. One lender makes this point, “If a producer doesn’t know what their numbers are, any change they make is simply a guess. And when you are dealing with hundreds of thousands of dollars, especially during times of tight margins, guesses don’t cut it.” 

• Keep communicating with your lender. Regular conversations, asking questions and sharing your documents with your lender is welcomed, said these professionals. “We want to know what your goals are and how your business is doing,” stated one lender of his producer clients. He added. “When a producer’s loan goes up for review, if we know their answers, we can be on their side when it is time to vote on a renewal or not.”

• Enlist the aid of professionals to improve your bookkeeping and marketing if it is not within your abilities or time constraints. Many lenders agree that recognizing the areas of the operation that need assistance and finding a way to get that assistance is the sign of a good manager.”

• Track family living expense. Many lenders noted that those producers who “get upside down” with debt most often are not tracking – or curbing – their family living expense. Family living expense on an average farm in the Midwest over the past five to six years has been as high as $87,000, when more realistically it should be between $50,000 and $70,000. Lenders advice: “Create a family living budget and follow it.”


Ratios to track

With regard to financial data, working capital, debt to asset ratio, net farm income, operating expense ratio and repayment capacity measures are all examples of data lenders say they like to track in order to assess how a farm is trending. Specifically, there are four areas of ratios: Liquidity, Solvency, Profitability and Repayment Capacity. 

From different ratios calculated they can assess positive or negative finance trends for the operation and how those ratios compare against industry based standards. (The industry has standards for each ratio, rated as red, yellow or green. Red indicates danger, yellow a concern and green ideal.) 

This process is similar to comparing EPDs to evaluate livestock or crop performance information for corn and soybean hybrids. Because there are some two dozen ratios that could be tracked, one suggestion is to ask lenders which ratios they prefer to benchmark on, this will help pinpoint what information your specific lender will want you to track on your operation.