It's OK to be bullish, but take stock of your finances

Despite the rosy outlook for commodities prices lately, farmers still need to watch their finances, and assess their balance sheets to put them in good financial standing.

That’s the advice of Brian Philpot, CEO of AgAmerica Lending, one of the largest agricultural lenders in the United States. Philpot spoke with Successful Farming recently about the challenges farmers face – even with times more bullish than the past 7 years.

SF: How are farmers doing today? Things sure look a lot different.

Brian Philpot: Obviously prices are much improved where they've been in the last several years. It was a rough, rough several years, and then COVID exacerbated some things. For the first time in a number of years, I think people feel pretty hopeful, are being more proactive and thinking about how they're going to move forward. You know, there's still uncertainty around a lot of things, but for the most part it's is as bullish as I've seen most of our clients in quite some time.

SF: Could farmers get complacent with good prices?

BP: It's not just complacent. I think you're able to breathe a little bit. You're out of crisis mode and you're back to focusing on the farm and other things you probably put off. But you are running a business, and part of business is knowing your balance sheet, knowing your P&L, knowing your margin of security and knowing where your sources of capital can come from. Whether you call it complacency or just getting on with other things, I encourage people to realize you're running a business and – whether you want to or not – this is just part of being a good business person.

The good farmers – the ones that have been through the cycles – they either had good habits or learn quickly and develop them. Your younger farmers that have never been through some of those cycles, they're developing habits.

SF: How do farmers look ahead?

BP: Farming has become so dependent upon technology and that requires you need cash and access to capital to plant or otherwise expand the farm. Now you've got to invest in technology and other expensive things. I think now more than ever farmers need to make sure they've planned ahead and have access to capital – before they need it. Being a lender in the business, a lot of times the farmer will tend to wait until they're behind the eight ball or otherwise, and when opportunities come along, they make sure they can take advantage. It's important – especially now that we've got a little bit of breathing room – that farmers take stock of where they are and make sure that they've got a plan for their balance sheet. They need the ability not only to make sure that they have a defensive game plan, but they've got flexibility moving forward to take advantage of any opportunities that may arise.

SF: How do customers grow?

BP: Whether there's another piece of real estate or whether it's just getting a deal on a tractor or buying some fertilizer, you want to be able to strike quickly. When those opportunities pop up, you don't want to have to go sit down and provide a bunch of financial information to your lender in order to be able to do that.

SF: Do farmers need to assess where they are?

BP: They need to know the health of their current operation. We've unveiled a Financial Health Check tool on our website. It gives the farmer the ability to put in some basic financial information– free of charge. You know, whether you get a green light, yellow light, or red light on your current operation, financially. Whether it's with their CPA or lender, no matter what kind of shape they’re in, they have got a plan or continue to improve it.

You don't want to have access to capital and just borrow money. You want to be able to know what you have and have a plan on how you might use it to make your operation not only better, but safer. Our mantra is, “We want you to thrive in good times; we want you to sleep well in bad times.” When the inevitable hits – we all deal with weather or price issues or now pandemic issues – something's going to come up, so plan around that unexpected event by knowing your balance sheet. Have a plan.

We did a survey with about 500 a number of years ago. One of the most stressful things in their operation was the lending process. The words they used were “uncertain,” “frustrating,” “complicated,” “slow,” all of that.

I think sometimes lenders try to act like the stuff that we're doing is rocket science, but ultimately we're trying to look at the balance sheet and trying to look at financial performance in the past and what we think it'll do in the future. There are some key metrics we look at. We created the Financial Health Check tool to simplify all of that, and be able to look at the really important parts. Let the farmer have control over, you know, essentially underwriting and assessing themselves. At the end of the day, if it improves a farm operation, it helps their business.

SF: Analyzing finances is a journey, not a sprint.

BP: You're right. That's a good way to put it. It should become part of your process of your annual cadence. I'm going to analyze my operation on a quarterly basis, annual basis, whatever it is: my inputs, my outputs, and other issues. We've seen it in a lot of farmers out there. They say, “If they have more cash coming in than cash going out, I must be doing something right.” But these operations have become more complicated. They rely more and more on technology. They get bigger and bigger. Every cent counts and the tools are out there to help.

SF: What uncertainties do farmers face in this environment?

BP: We all need to monitor everything being debated and will get passed in Washington. There's a lot: you've got tax policy, estate tax rules, capital gains tax rules, EPA regulation. Whether you would call it risk or something, it needs to be on everybody's radar and people are going to have to plan accordingly.

The big discussion is, “Are we going to have inflation?” You've been in the grocery store, gone shopping. Everybody's feeling some element of prices increasing. That's going to impact not only the price that you're getting, but also is going to affect your input costs. Ultimately if commodity prices go up, real estate prices generally go up with it. Debt and real estate prices and commodity prices are all sort of linked together. Historically speaking, debt levels on farm real estate hover between 10 and 15% of the value of farm real estate. We may see some increases in farm debt over time.

SF: What advice do you give to young farmers?

BP: There are programs out there for young farmers, USDA programs you need to bone up on. I think you need to have good mentors so that when you put together that plan to go out on your own, you need to have some good people with experience that are a sounding board for you. I think you need mentorship to make sure that your estimates of the capital you need are accurate. You need to be aware of all the programs that are out there.

We need to support beginning farmers. That's something that we're going to be focused on over the next year.

SF: You’re optimistic of the year ahead?

BP: Most everybody is pretty bullish on this year. America is still the best country to live in, and we're coming out of this. We're coming out of COVID in good shape, our economy is taking off and that bodes well for our economy and our farmers.