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By Dr. David Kohl

Dr. David M. KohlTransition is definitely occurring in the agriculture industry, whether it is capital assets, human resources, or the status of economics. The Millennial generation, comprised of those 18 to 34 years of age, is taking the reins from the Boomers and the Veteran generations. Within the next five years, much of the institutional memory of the 1980s will be in the rearview mirror. Whether it is young producers transitioning into agriculture through startup businesses, family businesses, or the partner route, the challenges in managing through volatile economic cycles will be a front and center priority. Parallel to this movement will be a similar transition occurring in ag lending and agribusiness. One might conclude that the agriculture industry in the future will not be Mr. Rogers’ neighborhood of the past.

With this backdrop, recently I facilitated a panel discussion of experienced lenders from a broad base of financial institutions which provides some perspective. This group was asked to provide some “wise old owl” advice to a group of younger attendees including producers, agribusiness people, and ag lenders. The following are the top nuggets of wisdom to ponder regardless of your age.

Cash Flow
Each individual on the panel stressed the importance of preparation of a cash flow projection. They indicated that if one thinks through their plans on paper including resources needed for production, marketing, and finance, this builds confidence between the borrower and lender. Knowing when periods of deficit are anticipated and how much operating loan needs will be is critical. On the positive side, times of cash surplus and how you will allocate those dollars will be very important also. Each panelist stressed the cash flow plan needs to be executed, followed up, and monitored for results. Execution of the game plan is often the weak link.

Sensitivity Analysis
Next, each seasoned lender mentioned the importance of sensitivity analysis related to price, cost, and production changes. The change from $8 per bushel corn down to $4 per bushel corn is an example. Effects of replanting crops due to bad weather that impacts costs or a rise in interest rates are both part of scenario and sensitivity planning. Loss of a global market impacting prices or a West Coast port strike can impact costs very quickly.

Third, a topic that is on everyone’s radar is financial liquidity versus equity. While older producers are often stronger in equity, younger individuals with less tenure in the business or those who are in a growth mode will often not have as much net worth or equity. Financial liquidity, that is, the ability to generate cash by selling short-term assets without disrupting normal operations, will be essential for success. Build liquidity in the positive economic cycle and preserve as much as possible in the downturn. The burn rate on working capital, or the time it takes to burn through working capital to a zero balance, will be very important in these post-super cycle years.

Business Plan
A business plan that contains goals, production, marketing, and finance details can go a long way in building confidence with your lender. On a side note, this is not only for young producers, but for tenured operations as well. Producer participants indicated the business planning process assists in answering the critical questions that are put down on paper as a guide.

One panelist indicated that lenders tend to be paranoid, worrying about the worst that could happen. Utilizing a business plan, it is important to touch base with your lender and discuss projected cash flow or tests for financial sensitivity. These can be great vehicles for communication of goals and aspirations as well as showing progress from year-to-year.

Productive Assets
The most seasoned lender pulled me aside afterward and mentioned another gem: Make sure to tell the individuals to invest in productive assets, that is, assets such as land, livestock, machinery, and human assets that will generate a positive bottom line. In his years of lending, he has learned a business can quickly get sidetracked with non-productive assets, i.e. killer toys such as vacation homes, high priced vehicles, and withdrawals from the business for personal purposes. Yes, everyone needs to enjoy the fruits of life, but keep it in balance.

This is some great wisdom shared by the “wise old owls.” With the changes occurring globally in markets, prices and costs, these points will be a top priority for 2015 and beyond.

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