For most dairy producers, the past couple of years have been like a roller coaster. An unprecedented boom in milk prices was followed abruptly by a gut-wrenching collapse. The run-up in feed and fuel prices last year has further eroded equity positions. The time to renew operating credit lines will soon be here.

Because of the magnitude and duration of losses experienced by dairy producers, renewal time is going to be difficult – both for you and your lender. How you approach your credit request and your lender will have an important impact on the outcome of your renewal discussion.

Here are a few thoughts for you to consider:

1. Understand your lender.
Most ag lenders are expecting a rugged renewal season this year. It is likely that every livestock-related loan, particularly in dairy and beef, will require extra time, scrutiny and hard choices. On top of that, many cash grain operations are facing potentially tighter margins this year – reflecting higher input costs last fall and spring, a jump in land rents and lower crop prices. Your lender is going to be glued to his or her desk for several months, with limited time to prepare financials and sort through your options. The more prepared you are, the better you will be able to get the best out of your lender’s time.

One more thing to remember: Your lender works for a highly leveraged business that uses other peoples’ money. Your lender’s goal is to get paid back and earn a reasonable rate of return in the process. Loan losses can quickly undermine the financial position of the lender. Put yourself in your lender’s shoes as you work through your credit request for the year ahead.

2. Be prepared.
This works for Boy Scouts and Marines – but it is also a good rule to follow in working with your lender. Know your situation. You can’t wait for your beleaguered loan officer to prepare your financial statements – even if that has been your normal practice.

Furthermore, you can’t afford to wait to discover the realities about your financial position until your renewal appointment. At a minimum, you should have your beginning and ending balance sheets, an income statement and a statement of cash flows prepared before you go in. These standard documents will give you a basic understanding of how your business has performed over the past year. And they set the stage for your plans for the year ahead. If you aren’t comfortable preparing and reviewing these statements – get help.

Your accountant would be a good place to start. You can also find lots of financial information, educational materials and spreadsheets online. Here are some examples:

Iowa State University
• Ag Decision Maker: www.extension.iastate.edu/agdm/wdfinancial.html
• Agricultural Management e-School: www.extension.iastate.edu/ames/

University of Illinois
• Farmdoc – particularly the FAST Tools site: www.farmdoc.illinois.edu/

University of Minnesota
• Interpreting Financial Statement: http://ifsam.cffm.umn.edu/
• FINBIN: www.finbin.umn.edu/

University of Wisconsin
• Center for Dairy Profitability: http://cdp.wisc.edu/

Penn State University
• Farm Finance Analysis Training: http://farmercourses.aers.psu.edu/

3. Spend some time analyzing your performance.
Did you make or lose money? Were you able to meet your cash obligations? Has the equity in your business increased or decreased? Was the change due to earnings or changes in the value of your assets? Booming land values can increase the market value of your net worth, but increasing land values can also cover up a world of problems that need to be addressed. The objective in preparing and analyzing your business’ financial statements is to help you understand the reasons behind your financial situation. The better your understanding of the business end of your business, the better prepared you are going to be for formulating a plan for 2010 and beyond.

4. Have a plan.
What do you want to do in the coming year? You won’t be able to develop a complete credit plan without input from your lender. But the place to start is with your ideas for your credit request. How much operating credit will you require? When? Why? If negative cash flows are likely or if your equity is dwindling, what will you do about it? Your lender will expect a proposal. It is, after all, your business, not your lender’s.

Don’t forget risk management. A marketing plan along with insurance and participation in relevant government programs can reduce the amount of risk that you face. Controlling your risk exposure means your lender faces less risk in extending credit to you. Use best management practices. High-cost, inefficient businesses are high-risk businesses. They lose money quicker during a downturn, and they take longer to recover once economic conditions start to improve. Careful production management that results in quality products and low per-unit production costs will support the lending decision. A careful audit of your dairy management practices with your nutritionist or vet may help with your credit request.

5. Have a Plan B.
Rolling over debt to cover losses works for awhile – if the economic downturn doesn’t last too long and you have the credit reserves to handle the additional debt load. But what if you don’t? During a financial crunch, shutting down an unprofitable enterprise or liquidating selected assets to bring debt loads down to more serviceable levels may be necessary. Adjustments on the liability side are also important if the business will not cash flow. Extending repayment terms or negotiating debt reductions or set-asides may be preferable to foreclosure or bankruptcy. Your attorney and tax accountant are essential advisers if you are looking at Plan B. PD

Robert W. Jolly
Department of Economics
Iowa State University
rjolly@iastate.edu