Ag lending, Advice for beginners in production agriculture
To operate a family farm or ranch, all your chips have to be in, and some say you have to have the “disease” to make it work, especially as a beginning producer.
According to Powell’s First National Bank and Trust Vice President of Ag Lending Todd Ernst, that disease is not enough – he says beginning ag producers must also have ag management in their blood.
“If someone has come in talk to me, I know they have agriculture in their blood. What we need to see is if they have ag management in their blood,” says Ernst.
He says he wants beginning producers to be aware of the stages of ag business life – start up, growth, consolidation and transfer.
“I want to get it clear in a young producer’s head that they won’t get rich the first year, the second year, the tenth year or the fifteenth year. There will be stages as they go up through that business life,” he explains. “When you start, you’re unproven, and the biggest place you’re unproven is in your managerial ability. You have to come off the focus of ‘let me at that tractor, or horse.’ It’s not all about production – maybe 50 percent is production, and the other half is managerial ability. You’ve got to have it, or they’ll never make it.”
Ernst says in the growth stage a producer is still young and long on energy, but short on capital. In consolidation, an operation has quit growing and is focusing on paying off debt, because it’s at a place where it can. The transfer stage, he says, is where a producer has enough to retire and to help the next generation come into being.
“There are two words to remember – ‘delayed gratification’ – because that’s what agriculture business is all about,” says Ernst. “You start a pauper, and you stay a pauper, until you get to the consolidation stage.”
“As you’re moving through those stages, hopefully you can see the light at the end of the tunnel, but while you’re doing it, that’s alright, too, because ag is a way of life,” he notes. “Don’t get discouraged. You might not have that big net worth, but you’re sill living the life, and the other will come if you pay attention to detail.”
Regarding the details of ranch or farm management, Ernst says, “I want you to know what your debt to worth is, what your return on assets is, what your working capital is, what your net worth is and how you’re trending in your business. Those are things you should know. To be a good business manager, you have to know how your business is doing.”
Ernst says a first step is to find a good banker. “You can’t hate every banker,” he says. “If someone comes to us from out of town, we’re suspicious, because we think they can’t get along with any of their local bankers.”
Bankers build on the four corners of equity, solvency, liquidity and capital.
“Equity is net worth – what’s left when liabilities come away from assets. If I’m making you a loan, you have to contribute 25 percent equity into that loan. Solvency is your debt to assets – what do you have, and do you have the ability to meet your long-term goals? Do you have a plan going to meet the claims against you in the next 12 months, or the next 24? Liquidity, or working capital, is the ability to meet your current bills. When I started in ag financing, no farmer used a credit card, but that’s the trend to make up for liquidity,” explains Ernst. “I’m seeing more people using credit cards for everything they purchase.”
“When you come to me, I give you a line of credit. That’s different, because when I give that to you it’s monitored and we put together a budget that’s tied to it. With the plastic, there’s no plan to pay it back,” he adds. “With a line of credit you’ve made a budget with income and expenses and you pay it back at the end of the year. A credit card is a whole different story. That’s hurting people – their liquidity is their credit card.”
Continuing with the fourth corner, Ernst says capital is what you need to make the money, or the proper equipment, land and livestock.
“I would recommend putting your thinking caps on and planning what the proper capital is that you need. If you’re going to buy a piece of land, will that service you the best, or is it the one that’s the best deal or the closest to home? Put the capital together that gives you the best return on your dollar.”
Concerning the Farm Service Agency (FSA), Ernst says he doesn’t think there’s anything better.
“No other businesses have it, that I know of. In production agriculture, we have FSA and you can go to their door without anything, and they’re willing to help you,” says Ernst. “For young folks, the best recommendation I can give is go down to the FSA shop and see what they can do for you. They’ll give you a great start with little or nothing.”
“Go to FSA, get a loan and go through the stages, build your net worth and solvency, and there’s only one way to do that – through positive cash flow and being profitable,” says Ernst. “We have to be profitable, because we take the profits to build net worth. There’s nothing else to it other than cash flow, which can be defined by discipline.”
“The most important thing I want to see from any producer who comes through my door is that they understand cash flow, and believe in it, and believe that it’s what will make them whole and successful,” he adds. “What you put down on a loan is not as important to me as cash flow.”
“When you’re putting together the budget, don’t look at it as something you have to do, but something that will make you money,” says Ernst. “That’s what will get the paycheck at the end of the year. Every detail will be scrutinized and studied, and you’re not just doing it to please the banker, but because you’re profit-minded, and you want to reach the end stage and be able to say I did it, and I did it right.”
Ernst says an ideal first meeting with an ag loan officer would include a briefcase, or folder, with details written down as to what the plans are for the ag operation, no matter how crazy they might be.
“That shows you’re thinking about it, and have put in some homework,” he says.
He adds it’s important to find a banker who understands that ag businesses include emotions, and that they’re family-based.
“There’s no better thing than being a production operator,” he says. “You not only get to do the farming, ranching and the work, but you’ve got a business going where you’ve got your finger on the pulse all the time, and with every decision you make, you’re in control of that deal, and you have the opportunity to make that grow. On the flip side, you also have the responsibility that if it flops, it’s your fault. “What an opportunity it is to produce a crop and feed the world, and have a business of your own, and make a go of it.”