To be successful in farming these days, it takes partnerships of many kinds, in addition to the all-important relationship between producers and their customers. One of the most important affiliations is that between the farmer and his or her financial institution. It has long been a practice in farming for producers to head to their local banks to borrow funds to get a new crop in the ground. The loans are then paid off after the crop is harvested and sold. But farming today takes much more than an occasion loan. More importantly, there are financial tools available for producers to help make their operations profitable and sustainable.
David Lynn, senior vice president for financial services with Farm Credit Mid-America (FCMA), said having good business/ financial plans are key components in today’s agricultural world.
“Net farm income is projected to fall in future years as compared to where we have been over the last four to five years,” he said. “We look at that and try to provide products and services to producers to help them sustain a period of decreased farm income.”
It is important for farmers to have a good balance, in their overall financial perspective and in their debt structure.
“Don’t put long-term assets on short-term debt,” Lynn said. “For example, it wouldn’t be prudent in today’s lending environment to finance a farm on one-year, fixed-interest rates, because with everything we see, it would predict that in the future, interest rates are going to rise,” said Lynn.
When coupled with that expected decrease in net farm income, Lynn added, it could be wise to fix those rates while they are still relatively low. Another recommendation from Lynn is to know exactly the amount of one’s operating costs.
“If you are a tobacco producer, for instance, it’s important to know what it costs to produce per pound or acre,” he said. “If you don’t know that, how do you know at what price to sell? And that is particularly true with livestock or row crops.”
Lynn also said FCMA stresses the importance of maintaining liquidity in a working capital position. In simple terms, that means having current assets that are greater than current liabilities. He pointed out that the company’s mission is to be in business for the long term, and that means providing for customers during good times as well as those times of decline.
“Farm Credit is actually part of a national system that was set up by federal legislation in 1916 as a way to have a reliable source of credit for farmers and rural residences. The organization operates as a cooperative system in that we are owned by our customers,” he said. “Of all the acts that Congress has passed over the years, this is one of the most important pieces of legislation, because it provided a stable, reliable source of financing for farmers and producers to clearly help entrust that we will continue to have a safe, reliable food source.”
That’s not just feeding those in this country but a growing world population, said Lynn. To do that, FCMA offers a variety of services to farmers and those living in rural areas. One of those services is crop insurance. Lynn said a major component of the latest Farm Bill was an increase in funding for crop insurance, something important to the mission of supplying a safe and ample food supply.
“Many people fail to understand the importance of that. What crop insurance does is to provide an indemnity payment in the event they [farmers] have a significant loss,” he said. The company also supplies a variety of loan products for small, part-time farms and the large full-time producer, including operating lines of credit.
While FCMA may have been created by Congress, Lynn said many people might assume the funding comes from the government, as well. But that is not the case.
“Funding is accomplished through the selling of Farm Credit bonds by the Federal Farm Credit Funding Corporation,” he said. “It’s a great example when a cooperativeowned membership is supported through investors worldwide.”
FCMA serves the states of Kentucky, Tennessee, Indiana and Ohio. Lynn said the area is very important to the country’s ag sector, and it is the diversity within Kentucky’s ag industry that is key to the region’s success. The entire Farm Credit system is roughly a $200 billion company, of which $20 billion or 10 percent comes from the FCMA area. Lynn said those figures serve as an example of just how important the agriculture industry is to this region. A report soon to be released by the University of Kentucky quantifies that and will highlight the ag industry’s impact throughout Kentucky.
During a recent meeting with UK agriculture economists held at the Kentucky Farm Bureau Annual Meeting, UK’s Leigh Maynard, Department of Agricultural Economics chair, said the total impact of the state’s ag and food clusters amounts to about $43 billion, or 8.4 percent of Kentucky’s total economy, according to information that will be included in the report.
Lynn said with a good business plan and by following good practices, Kentucky farmers can stay sustainable during the good times and the slow periods, something that is important to all of us.