Purdue News

October 30, 1998 Experts advise farmers to build bridges with lenders WEST LAFAYETTE, Ind. -- With farm income in the United States expected to be down by 15 percent from last year, Purdue University agricultural economists are advising farmers to cement relations with their lenders now. According to Purdue agricultural economists Ken Foster and Mike Boehlje, this income crunch will be even worse in Indiana and the rest of the Midwest, where farmers earn most of their income from corn, soybeans and hogs. "Worldwide, meat and grain supplies are large this year," Foster said. "That alone would create lower prices, but the Asian crisis also has drastically reduced demand for U.S. commodities." Foster said he expected prices to remain low into 1999. "The Asian financial crisis is still with us and will probably take some time to be completely ironed out," he said. "However, the Japanese government is now taking action to repair the country's banking industry. This will be a boost for Asia and ultimately for pork demand. "The current situation is difficult for all producers. Dealing with this financial stress will require interaction with lenders." These are Foster and Boehlje's recommendations: Communicate. Farmers should communicate soon and often with lenders on anything that might affect their ability to repay debts. When things aren't going well, there is a tendency to avoid confronting the problem. This understandable reaction can lead to lenders learning of problems too late. Providing lenders early warning will give them a chance to explore various strategies with you, and it also can establish a sound foundation for future credit requests when the situation improves. Share your plans. Show lenders how you will deal with your situation and offer evidence of how your plan can succeed. A convincing strategy will make a lender more willing to extend more operating credit, delay principal payments or refinance debt. Prepare and share detailed financial statements. At a minimum, the lender should be shown a current balance sheet, a recent income statement, a projected income statement for next year, and cash-flow projections. In this situation, the more information you provide, the better, because the lender becomes a de facto partner in your operation. Evidence that you are withholding any relevant information may cause the lender to become inflexible, and it could jeopardize your relationship. Discuss how you will control risk. Some risk-reducing marketing strategies use futures, options and forward contracts. While some of these limit the upside potential of price increases, they also can secure a steadier stream of income. Other strategies include contracts and joint ventures in which multiple parties share risk. It's important to note that in most cases, no single party can bear all of the risk. Therefore, contracts should be written to allow renegotiation of terms and variation in payments as market conditions fluctuate, or they should share risk equitably among participants. Diversification also works as a risk-reducing strategy, although it may not be as effective under current circumstances. Diversification works when enterprises have income streams that are negatively correlated. Be flexible but in control. For example, it is not uncommon for lenders to suggest liquidation of capital assets such as timber, a cow herd or real estate to reduce debt. Depending on the asset's future earning capacity, this may or may not be wise. This is where a good plan comes in handy, because it may be necessary to show the lender how and when the long-term gain of holding onto these assets will occur. Get to know your lender on a personal level. It's easier to work with people you know and trust. This is true for you and your lender. Choose an agricultural lending expert. His or her understanding of production agriculture may be essential to securing credit. Shop for credit. Consider the institution, the agent, interest rates, limits, management freedom and useful advice. Check with the Farm Services Agency or co-signers about credit guarantees. In some cases, even a producer with sound finances can't get credit, because of lack of collateral. Credit guarantees can provide short-term operating capital to keep an operation afloat until management changes can be made or markets improve. Don't wait until the last minute to line up such guarantees. If there is a chance that you will need them, start your search now. Pay off debts promptly whenever possible. Prompt repayment of obligations, when possible, will establish a good credit record for the future. CONTACTS: Foster, (765) 494-1116; Boehlje, (765) 494-4222 Compiled by Chris Sigurdson, (765) 494-8415; E-mail, sig@ecn.purdue.edu Purdue News Service: (765) 494-2096; e-mail, purduenews@purdue.edu To the Purdue News and Photos Page