With over 40 years of experience in agricultural finance, Blanchfield spoke at the recent Great Lakes Regional Dairy Conference in Frankenmuth, Michigan. He said the differences between the top 25 percent and the bottom 25 of dairy producers are very small, and he offered some incremental changes producers could make to be more prepared for the days and months ahead.
“The farm economy has changed, and you have to change with it. It’s been volatile since the 1940s and it will continue into the future,” Blanchfield said. “For millennials, the best years in this industry may have already gone by, so be prepared.”
He warned that while interest rates are low now, it’s likely they will rise significantly, and if you have loans with variable interest rates, you are leaving yourself exposed and you may want to renegotiate those loans.
Looking good from a financial perspective is important in ag lending. Blanchfield said 40 percent of Midwest bank CEOs’ biggest concerns in 2019 is ag loan defaults. He said, “That means you need to look as good as you can in order to borrow money successfully.”
There are several steps to the borrowing process. A plan that is well thought out and that you have working familiarity with is crucial. Producers need to ask themselves, “Is this good debt or bad debt?” and “How much skin do I have in the game?” Is the request a Hail Mary, and is it achievable based on past performance?
Blanchfield emphasized the importance of accuracy when it comes to financial statements. “They don’t have to be perfect; they just have to be decent and accurate. If you could get the balance sheet and the farm operating statement completed, that would be a huge step in the right direction,” Blanchfield said. “A Schedule F from your 1040 income taxes is not an operating statement.”
Blanchfield said when lenders show up at the farm, “Don’t let it look like a goat rodeo.” He said lenders are not only looking at the overall condition of the operation, they are also listening to how the owner talks to the employees. Mutual respect between the employer and employees is important. Lenders are also looking for how well the livestock look, if the machinery is well maintained and under cover, if there a lot of “toys” around the farm and how often the farmer’s cell phone is ringing during the visit. He asked, “Are key people working, or are they sitting around waiting for Dad to tell them what to do?”
Success in 2019 means survival, and convincing your banker to fund a project is only part of it. Blanchfield said, “The ‘new normal’ of the recent past has been replaced by the ‘new, new normal.’ And the poor farm economy means that more tough choices have to be made.” He said this isn’t an economy that rewards more debt. It will be hard to grow out of this economy with debt. He posed the question, “Is your operation a going concern or a closing concern?” And protection of your remaining equity is essential.
Loan covenants are being used more often today, and Blanchfield said to make sure you know exactly what those say before you sign them. Realizing dairy farmers are the least likely to have cash flow, he stressed, “Cash is your friend; keep it around.” He also said equipment sitting around the farm not in use should be sold “if it’s not carrying its weight.”
Blanchfield warned against having too much short-term debt. He explained, “As farmers, you always want to borrow short and pay things off as soon as you can, and as a result, when your income goes down, you get behind in other areas like taxes or the feed bill or fertilizer.” He continued, “Remember to finance like with like. However long that asset is going to last, that’s how long you should finance it.”
Financial issues are not always enjoyable to discuss with your banker, but it’s necessary. Keeping the bank up to date with what is going on is crucial. Blanchfield also said involvement with farm groups, paying attention to what’s going on outside of your farm and taking advantage of learning opportunities are great ways to stay on the cutting edge of agriculture.
For the younger generation partnering with their parents, he advised to be patient. “They have wisdom, and you may not always get the newest piece of equipment when you want it,” he said.
“No one wants you to farm until it’s all gone,” he said. “Keep your banker as a willing partner; having a little more insight into what he or she has to do for you will give you an edge, and this economy is all about having little edges to have success in 2019.”
He concluded, “If you get through 2019 and you have your business intact, your farm intact, your family intact, you’ve won. That’s my definition of success.” He added, “We are in the new normal, and more tough choices have to be made. You can’t borrow your way out of this.”
Five years ago, Blanchfield founded Agricultural Banking Advisory Service, an independent consultancy dedicated to helping community bankers improve their ag lending programs with the goal of making more credit available to farmers and ranchers. Since starting his company, Blanchfield has published over 20 articles on ag banking and has delivered more than 60 speeches to bankers and their farm and ranch customers.
Melissa Hart is a freelance writer in North Adams, Michigan.
PHOTO: Illustration by Kristen Phillips.