The COVID-19 pandemic disrupted milk marketing channels and agricultural supply chains, affecting dairy producer cash flow, balance sheets and relationships with their bankers. In an economic climate of rising input costs, the 2021 World Dairy Expo featured an agricultural lender panel addressing “How are we evaluating farm loans?”

Natzke dave
Editor / Progressive Dairy

Representing three agricultural lending institutions and geographies, the panelists included: Sam Miller, based in Wisconsin and managing director of agriculture banking at BMO Harris Bank; Roger Murray, executive vice president and chief marketplace officer for Farm Credit East, serving customers in New York, New Jersey and New England; and Matthew Wilson, vice president and senior relationship manager for Rabo AgriFinance in Amarillo, Texas.

Following are edited excerpts of the seminar. For more discussions on inflation and interest rates, the role of government payments, dairy farm exits, how base-excess plans impact loan applications, milk production trends and more, a video of the full discussion is available on the World Dairy Expo website.

Q: What is the lending climate like right now for farmers?

Miller: The farm economy the past couple of months has been pretty good almost across the board. That’s helped strengthen balance sheets and improved working capital. Cash flow and profitability have been good. There are some storm clouds on the horizon though, due predominantly to higher input costs. Milk prices, although they're up, they're not up as much as expenses are, so margin compression is happening.

Murray: It varies a lot by region. Milk production caps are creating a paradigm shift for a lot of the producers in the East. Adding a few cows to pay for additional debt isn't quite as easy with the current climate.


Wilson: Dairy in particular has firmed up the balance sheet. Certainly, the production limits and the supply situation are troubling right now.

Q: When farmers are looking at where to spend their money, do you still see equipment as a strong investment?

Murray: It’s more about getting the farm in sync. Buying a new chopper because you may have the cash flow to do that may put other things out of sync. Equipment is usually not a bad investment, maintaining the technology you need. The data that comes from this new equipment is helpful for a lot of our customers, but it's all about staying in balance.

Q: What about land? If land becomes available for farmers is that still the gold standard on where you put your money?

Murray: The farm next door doesn't come up for sale very often, but we must look at whether we’re going to turn investment dollars into additional profit. It's very specific to each individual farmer.

Miller: Land, historically, has been a fantastic investment and it typically can outyield the stock market in the long run. But never in my career has land paid for itself when you buy it. So, it's a combination of the earnings you get every season and long-term appreciation.

Q: Given the price of construction materials, are you telling people to wait?

Wilson: It seems like things have plateaued, cost wise.

Murray: It’s not just about the right time but making sure you have the resources and contingencies if you have a cost overrun. The other big part is delivery delays. You may have to go six months more with an asset sitting empty, not generating any revenue, waiting for a critical piece.

Q: Why is it important to form a relationship with the person you're going to be asking for a loan?

Wilson: Relationships are critical in every facet of every business. Good communication is critical whether it's good times or bad times, whether you're looking for ideas on how to invest additional capital, or maybe in times when you have some tough decisions to make.

Murray: It is important that all aspects of the operation are included in communicating with the lender. If it's a husband-and-wife team, they both must be at the table. Always include the vet and nutritionist. If you have a profitability team, that's going to make a big difference. Include the next generation that's going to take over the business.

Q: When it comes to dairy, does size matters when it comes to lending?

Miller: We can debate about where that the number is, but it's clear there are economies of size and scale. Things like the Dairy Margin Coverage program have really helped smaller producers by providing a greater safety net.

Murray: I'd echo that, but smaller farms have the ability to adapt, whether it's non-farm income or diverse enterprises. Some of our most profitable farms are still small- and medium-sized farms that have figured out the right formula and got everything in balance.

Wilson: It depends on how the business is structured. Smaller dairies may not have all the economies of scale and size, but at the same time, they're probably not exposed to the disruptions in the labor market that we're having in some of the larger operations now.

Q: When you think about your top producers, some of your most successful clients, are there things that they have in common?

Wilson: They tend to be very detail oriented in terms of profits, losses and costs of production. They can then target price levels for their commodities.

Murray: When I started my career, a lot of my dairy farmers were good with cows. The top producers today are really good with people, and they also have that zest for learning, seeking different ways to bring new ideas to their farm.

Miller: They plan, execute and monitor. The top producers monitor different dashboards. First is a production dashboard, metrics that they're looking at on a daily, weekly, monthly and annual basis. They've got a financial dashboard. And now, they’re looking at a macro dashboard. What happens if China quits buying dairy products? What happens if there's a livestock disease somewhere? Those kinds of dashboards can provide an idea of what do they need to do to adjust the plan and execute in a different way.

Q: When it comes to evaluating farm loans, what are critical factors?

Miller: You look at the strength of the balance sheet, at the cash flow, at the profitability, at working capital and at collateral. The difference is that the quality of those metrics changes from year to year. The way we analyze loans hasn't changed, but depending on where you fall in critical financial metrics can change how that loan looks.

Murray: We're relying more on all sorts of data. It used to be debt per cow; today that’s maybe one small factor. It all depends on how that fits with the overall investment in your farm. Are you using robotics? Do you have access to special milk market premium? Having a dashboard that you can discuss with your management team on a daily or weekly basis is critical.

Q: Are there any rules of thumb that you look at to evaluate the financial strength of a dairy?

Miller: I've always had a real challenge with that because not every business is structured the same way. Everybody has a dairy farm and a milking herd, but what kind of land base goes with that? Are they cropping their own land? Do they own the machinery and equipment? There are some general metrics: debt per cow, debt per hundredweight or operating expenses as a percentage of revenue. I tend to look at it how the business is trending against itself.

Murray: We look at how farms trend against themselves and with other farms in the region. We look at debt to EBITDA [earnings before interest, taxes, depreciation and amortization]. Another one we look at is the debt service coverage ratio, looking at how well are you able to cover farm debt payments over a blended 10-year term. That allows us to even out ups and downs, getting a more accurate view of what that farm’s profitability can be over longer terms.

Wilson: One thing we look a lot at is the frequency of cash flow, i.e., dairy farmers are getting paid twice a month, corn farmers get paid once a year. Operations that have more-frequent cash turnover tend to support more debt. In crop farming, I typically see a debt load over 50 percent starting to be troublesome. In dairy, they can sustain a little bit more than that.

Q: How are robotics and other technology affecting the structure of loan?

Miller: We've learned a lot about robotic milking systems in the last several years as more of them get built. The amortizations aren't 20 years like they were when you built that milking parlor. You should probably look to see them get paid back in a seven- to 10-year period.

Murray: Being able to pay for that in a shorter timeframe is going to be needed just because the rate of change is continuing to accelerate as well. Technology needs to be replaced with something better and newer within 10-15 years at the most.

Q: What would you say to young people when they ask whether they can farm?

Murray: I would say definitely yes … if they have a passion for it. Work closely with a mentor or people you respect. Don't be afraid to travel; get outside your comfort zone; broaden your horizon. Have fun at it.

Wilson: The path may take a little different direction than just walking onto a place and managing milk. A young producer who recently relocated to our area came from a dairy family that had been through some financial duress, and his father exited the business. He got his start as a cow buyer, building equity and gradually working his way into owning his own dairy and expanding it.

Miller: I tell young folks it's a marathon, not a sprint. It starts with experience and building up equity and liquidity and then figuring out the path from there.