With the turmoil of dairy markets the past few months, farmers may likely be looking a bit deeper into their balance sheets and income statements for 2020. Ideally, some of those conversations involve the farm’s lender as a trusted financial adviser.
It seems everything about life has been turned upside down. But fortunately, that’s not the case with credit in a time when many need it most.
“The fundamentals of this business have not changed,” said Sam Miller, the managing director of agricultural banking for BMO Harris Bank. “Bankers still look at the five C’s of credit.”
Miller joined the May 20 Hoard’s Dairyman DairyLivestream with the executive vice president of Farm Credit East, Roger Murray, and Cornell University agricultural economist Chris Wolf. The recording of the entire discussion, including audience questions, can be viewed here.
The five C’s
The five C’s of credit are character, capacity, collateral, capital, and conditions. These have not changed, although maybe the priority they are analyzed in has shifted, said Miller.
“What’s new is nothing,” added Murray. “We’re approaching this downturn like we have all the others. The interesting tweaks, though, will be some of the assistance programs.”
Working capital is the first line of defense in these cases. Miller recognized that cash flow may be tight as payments from various aid programs lag behind the deliverance of low milk checks.
Murray further emphasized the importance of liquidity to provide flexibility as market uncertainty continues.
“Now would be a good time to evaluate your cost of production,” Murray advised. In his organization, that remains a vital tool for lenders to evaluate credit worthiness. One measure that has grown in importance for creditors is the stability of a customer’s milk market. Depending on geographical location, Murray pointed out that this is of more interest than usual.
“Liquidity and solvency don’t tell you what you should do, but it can help indicate if you need to do something,” Wolf said.
How a lender can help
Miller outlined some of the tools they have offered to customers looking for a change:
- Increasing lines of credit
- Reamortizing a loan
- Deferring principal payments
- Advising on cost-control methods
- Managing equity
Equity management may be challenging, as many of those measures might have already been taken in the previous four years of low prices.
Both Miller and Murray encouraged the use of risk management programs, not only to supplement cash flow, but also to improve your portfolio with your lender. The time to look into programs like Dairy Revenue Protection (DRP) is now when futures are higher.
To hear specifics from Miller, Murray, and Wolf, visit the recording of the discussion.
An ongoing series of events
The May 27 DairyLivestream will feature “Candid comments from the nation’s capital” with special guests Michael Dykes, CEO of the International Dairy Foods Association, and Jim Mulhern, CEO of the National Milk Producers Federation. The episode is sponsored by Boehringer Ingelheim.
As always, the panel of experts will discuss over 30 minutes of audience questions. If you haven’t joined a DairyLivestream broadcast yet, register here. Registering once registers you for all future broadcasts.