Short- and long-term financial tips from ag loan lender CEO

Volatility appears in agriculture in a multitude of ways. Weather patterns remain unpredictable across the Corn Belt and into other regions of the United States. Another factor lies with the global markets, which have seen consistent shifts the past few years. The fluctuation of input costs and other expenses creates more uncertainty for farmers, too.

Regardless of which factor, volatility presents obstacles for farmers. While farmers experience this firsthand, Brian Philpot, the president and CEO of AgAmerica – an ag loan lender located in Florida – also notes this in the lending industry.

"Farming's a volatile business," Philpot says. "It can be more volatile in some commodities than others, but when you lend in the ag business, I think you've got to be mindful, and you've had to [have] been mindful historically of that volatility."

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Short-Term Practices

In Philpot's experience with lending, he's noted some key financial variables for farmers to continually monitor.

• Balance sheet and balance sheet structure
• Financial stack
• Current assets
• Current liabilities
• Your rainy-day fund
• Your worst-case scenario

"The structure of that balance sheet, and the amount of debt you have, and the amount of working capital liquidity you have access to is a direct correlation in your ability to withstand that unforeseen incident," Philpot says. "It really doesn't take a lot to sit down and inventory that and compare those ratios with best standards, best practices."

Philpot says working with your lender and financial advisers can help evaluate those financial variables for your operation.

The practice is essentially a stress test for a farm, Philpot says.

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Long-Term Practices

After evaluating the short-term variables, there is planning farmers can do to financially benefit in the long term.

Applying both long-term and short-term goals that align can assist the longevity of a farm from a financial standpoint.

Questions Philpot says farmers should ask themselves includes:

• What's the max debt load you can have?
• What's the amount of working capital you can have?
• What are the ratios of your commodity?

"A lot of times people, they'll build up some working capital and decide to go out and make purchases, and it'll deplete the capital and increase their debt load," Philpot says. "That can bump that 20-year plan and throw it out window. On that 20-year plan, people need to have goals as to how big of a farm they want and what is their profitability ratio. And they need to be disciplined about that."

Philpot says the discipline required to avoid overextending yourself is a key to building off your long-term plan.

Along with not being too aggressive with financial resources, building a buffer is important, too, according to Philpot.

"Let's face it, your finances are protecting your farm," Philpot says. "You want to think of your working capital, your cash, as the buffer against those unforeseen circumstances."

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Looking Ahead

Philpot says technology continues to grow in importance for farmers. He says farmers embracing technology tend to have a stronger balance sheet and possess strong planning characteristics. He calls them "progressive businesspeople."

On the lending side, Philpot expects data to be a big factor in the next 10 years.

"I honestly think for ag lending, it's always been relationship oriented, and it will continue to be," Philpot says. "But I think data can better inform our decisions in terms of how much we lend, when we lend, but also how we counsel the borrower when they're making those decisions of how much to borrow, how they should structure that balance sheet. We can give them more direct and beneficial information.

"As lenders, we've got access to a lot of data – performance data from a lot of borrowers, and [we] can come up with some good rules of thumb based on something as opposed to pulling a number out of thin air. I think data over the next 10 years will continue to be a big part of what we and any good lender does and what will have a direct impact on the way that whole lending process goes. It hasn't changed a lot over the last 50 years, but it's really going to change a lot over the next 10."