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Tips for Managing Through Challenging Times

Farm Credit Loan Officers Give Practical Advice

Landscapes Winter 2011
FARM MANAGEMENT

cracked dirt

Farmers and ranchers in most of Texas and eastern New Mexico have endured the driest year in memory. Last spring, some farmers along the Mississippi River experienced serious flooding, and in Alabama and northeastern Mississippi, pockets of farmland were flattened by tornadoes.

If there’s a silver lining to the severe weather cloud of 2011, it’s that most producers are better positioned to handle adversity than in the past. Even if you don’t face weather or market stresses today, best management practices could help you survive what tomorrow may bring.

“Not a single producer in our area has been untouched by the drought,” says Alan Watson, chief operating officer of AgTexas Farm Credit Services in Lubbock. “But most customers managed their business well in recent years and accumulated a sound financial base to make it through. Most also took advantage of risk management tools like crop insurance to mitigate losses.”

On the West Texas plains, the drought has impacted livestock producers and dryland farmers most, according to Kenneth Hooper, senior vice president in Panhandle-Plains Land Bank’s Plainview branch. “Fortunately, over the past couple of years, most producers built up equity,” Hooper says. “You didn’t always see it in cash — some used earnings to pay off loans early.”

David Anderson, a Texas AgriLife Extension Service economist and professor in the department of agricultural economics at Texas A&M University, specializes in livestock. “Ranchers forced to sell off or cull herds received good prices for their cows,” he says. “In addition, livestock producers found pasture and rainfall insurance useful.”

During times like these, it’s important to stay in close contact with your lender, according to Johnny Schmucker, vice president and branch manager for Great Plains Ag Credit in Dumas, Texas. “Give your lender time to consider how they can help,” he says.

Schmucker, Anderson, Hooper and Watson are located in the heart of the driest regions. Jesse Craft, Louisiana Land Bank’s chief executive officer, says that less than 1 percent of his association’s customers have been affected by drought. Some in southern Louisiana faced flood damage, however. Nearly all of their customers realize they could face challenges next year.

“Farmers have dealt with natural disasters since time immemorial, but today they can access more tools to manage risk,” Craft says. “At Farm Credit, we don’t fall out of love with agriculture during challenging times. We’re committed to agriculture and rural America every day, through good times and bad.”

We asked these Farm Credit and Extension experts to share tips on how you can manage through challenging times.

Stay on top of your cash flow and defer spending.

Hooper: Update cash-flow statements and balance sheets monthly. This helps you get a grip on your situation early enough to do something about it, such as cut expenses. About one-third of our cotton producers this year had fair amounts of water for irrigation, and they’ll actually produce well; another third had weak amounts of water; and the rest grew on dryland acreage and produced no crop. We are concerned about producers with weak water farms. However, dryland acres failed early, which was a blessing of sorts — these farmers received insurance settlements before they spent too much trying to rescue a crop doomed to fail.

Communicate with your lender early and often.

Watson: Don’t let the impact of negative conditions come as a surprise to your lender. You may have more options to maintain and restore working capital than you think. Keep an open mind to your banker’s suggestions. Do everything possible to avoid becoming delinquent — you’ll have much more flexibility to restructure.

Ask about loan restructuring.

Craft: Each loan’s maturity should match the life of the item purchased. Cash flow should pay for short-term operating expenses, and profit should pay for longer-term capital purchases such as equipment and land. Structuring loans properly may put you on the road to profitability.

Work with your lender to secure a loan guarantee.

Watson: Under a guarantee program, your association remains your lender and direct contact. We can work with the Farm Service Agency to find a guarantee that might allow us to extend more flexible terms.

Consult with tax advisers and accountants.

Anderson: The IRS allows ranchers to delay paying income tax on earnings over and above normal livestock culling, if you spend the money to reinvest in breeding stock later, and if your county is declared a federal disaster area. This will be a useful tool for many ranchers. You’ll need good records to make the case. Good records are critical in times of stress.

Contact your Extension agent to access planning tools.

Anderson: The Extension service offers great information on budgeting and management. We provide computer spreadsheets that help you think through various strategies before you make decisions. They’ll also help you compare actual costs to liquidation and starting over, which was important to beef producers this year. Fortunately, ranchers forced to sell received good prices, but if you are looking to rebuild, cow and heifer supplies are projected to be tight and prices high, and feed will remain expensive.

Purchase risk management products.

Watson: The federal crop insurance program provided almost all crop-related revenue for dryland farms on the South Plains this year, and will supplement income for irrigators with reduced yields. Farmers in our area use crop insurance because input costs have become so high and our weather’s so unpredictable. This winter, whether you raise crops or livestock, Farm Credit can put you in touch with an insurance agent to help you explore risk management products for 2012, including crop, drought, rainfall, pasture and income insurance.

Contact your insurance provider early.

Anderson: Farmers abandoned more than 50 percent of cotton acres in Texas this year. In some cases, there just wasn’t enough water. Other irrigators couldn’t keep up with hot temperatures. Those who talked to their insurance agent early found it helpful.

Find other ways to reduce risk.

Schmucker: Know your production costs and break-even commodity prices. Take advantage of dips in production costs and increased commodity prices by contracting ahead. Be sure to match up your major input costs with a contract to sell the commodity; this allows you to build in your profit margin. If you contract commodity prices ahead of production without locking in production costs, you’re exposed to increased input costs during the year. Don’t forward-contract your entire crop — you need to be able to deliver on the contracts. You can use other marketing strategies on the remainder of your crop.

Be flexible — make decisions based on today’s reality.

Hooper: With virtually no rainfall, irrigation costs went through the roof. Farmers who used irrigation found it wasn’t always cost-effective to push for the highest production. Smart irrigators consolidated what water they had on the crop they thought would yield the best return. When insurance coverage allowed some acres to be abandoned, they consolidated water on the crop with the best potential. Some corn producers realized the risk of taking the crop to grain harvest — they chose to harvest the corn as silage mid-season, selling it to dairies. Take a hard look at your operating practices; what works in a normal year simply does not in a drought.

Consider investing in improvements.

Schmucker: Most dairies in our area milk 2,400-plus cows. Most grow a majority of their silage, which helps, but they’re susceptible to higher feed costs. If you have the resources, it might be a good time to purchase or lease land to grow most of your feed. Crop growers might consider investing in irrigation equipment, since irrigated crops do better in dry years. Base your cropping plan on your farm’s irrigation capacity.

Build equity during the good times.

Hooper: If you’re having a profitable year, set aside cash to build equity so you can survive future challenges. A lot of producers have taken that to heart, and we think that’s holding land values steady in the Panhandle and South Plains.

– Nancy Jorgensen

For more information, visit http://agrilife.tamu.edu.


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