How High-Profit Farmers Handle Debt
Executive summary: High-profit farms aggressively refinance for better rates, keep in better touch with lenders and use debt to boost productivity compared to average farmers.
Bryce Knorr
Published: Aug 4, 2009
How do profitable farms handle debt and their banking relationships? Farm Futures’ exclusive survey in 2006 found an on-going shift in attitudes among high-return operations:
Refinance to get a better rate. Our research shows most profitable producers actively refinanced debt to get out of higher rates. And the most profitable farmers in our survey were the most aggressive in this wave of refinancing.
Having a prepayment option on any new fixed rate loans gives you the flexibility to pay them off and refinance should rates drop in the future.
Borrow for productive assets. With land and input costs rising, producers on average shift more of their debt to cover those expenses. High-profit farms, by contrast, use debt for machinery instead to boost productivity, holding the line on land debt and actually cutting input financing. Buying machinery also allowed high-profit farms to take advantage of dealer financing, which they used more extensively than the average operation.
Avoid high levels of debt. Farms with above average returns usually have higher levels of debt, using leverage to grow. But our latest survey showed this trend appeared to moderate, as high-profit farms were less likely to have debt to assets ratios topping 40%, a traditional red flag for lenders.
Credit cards have emerged as a major source of financing in our survey, with 35% of producers saying they used plastic for their farm business, almost double the percentage of 1998. However, only 13% of the high profit farms said they used credit cards as a source of funds.
Learn to communicate. Most producers we surveyed had been with their primary lender for at least 15 years. High profit farms tend to have newer relationships. However, since loan officers don't always know agriculture, they make it a point to keep in touch. The average high profit farmer talks to his loan officer at least once a month. They discuss more than the weather or children. Loan officers increasingly rely on ratios to analyze their clients; high profit farms are more likely to track these numbers already, we found.
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