Moody’s Analytics : Ag Chat Series

Welcome to our Moody’s Analytics Ag chat series. My name is Doug Johnson, Ag strategist from Moody’s Analytics and with me is Brandon Baller, Branch President of Security Bank in Hartington, Nebraska. I wanted to do this series as a follow-up to the Ag webinar I just did, that had over 900 lenders and producers registered. The theme of that webinar was “The Ag Commodity Markets and Five Tips to Improve Profitability”. Let’s break down some key points that both lenders and producers can think about to help take advantage of these commodity markets and some tips you definitely need to avoid.

It is safe to say most regrets don’t occur on the production side of the farm – most regrets occur on the marketing side. It is really rare to hear a producer say they, “sure messed up on the planning, but nailed the marketing side and hit the peak”.

What is your suggestion to help producers make the marketing side as strong as the production side of their operation?

Brandon Baller  

A lot of the producers we work with define success or failure based on whether or not they hit the highs in the market. As you know, that sets up a lot of people for disappointment. Having a good understanding of what the numbers are telling you as a producer and how to apply, will help producers make informed decisions on the farm and expenses are a key component of that. Most producers have a pretty good handle on what kind of yields they can expect and generally where grain prices are at heading into the year. We are not too far off on that – it’s usually on the expense side that we need to take a closer look at.  Some of the producers that we’ve worked with have had the ability to use some bookkeeping systems, such as QuickBooks or Quicken, to get exact numbers on the expense side.  With the help of those systems, we are more consistent at coming up with cash flow projections that are accurate, meaningful, and can then be used to help producers make successful marketing decisions.

Annually, we try and bring all our producers together and provide an educational conference.  We bring in guest speakers to talk about different bank financials and things we do all day, every day – that most producers don’t typically enjoy but still understand that it’s important. We try and be intentional about providing education along the lines of financial literacy as it pertains to the farm.  Knowing the numbers is as important as knowing when to change the oil in your tractor.  

   Doug Johnson :

As you look across the industry, most banks ask for the same information, “I need your balance sheet, I need your projections, I need your tax returns.”  In your opinion, what is the challenge with just asking for that?

Brandon Baller   

It is the way that it gets asked sometimes, Doug.  You could say, “I’m sorry, Doug.  You know these bank examiners. They ask us to get some updated numbers so just throw a few numbers together or take some industry averages. Throw that in the file and call it good”. Or, “how much do you need to borrow this year, and sign here, and good luck. We’ll see you next year.”  

We take the approach where we are not going to apologize for the information we are asking for. In fact, we are going to take it one step further and provide a little bit of an education so you understand what the numbers mean to you. 

There are a lot of producers that hear their banker talk about working capital, debt service margin, and owner’s equity –  but really lack the understanding of what that really means to them, why it is important, and why they should care.  It is getting beyond just asking for the information but being able to articulate, “why they should care”.

   Doug Johnson :

When you look at some of these financial statements, do you work with your producers and actually talk to them about the farm financial standard ratios?  (The key metrics that your bank looks at. )  And do you educate them on those six eight whatever ratios you use, what they mean, and how they apply?  

Brandon Baller   

We do.  It is part of a take-home packet we give our customers every year. We also look at State of Nebraska averages and we aggregate all of the data that we have on the balance sheets and cash flow projections that we take every renewal season.  Then they can see where their numbers fall in line with some of their peers.  We believe that’s helpful. And we’re providing that education not just one time –  but on an annual basis. It’s a fine line.  We’re certainly not trying to talk down to anybody but I believe our producers understand there are things we can do that they are unable to and things that they can do that we can’t either.  It is more of a team approach and hopefully they trust us with that aspect of their business and that we’re familiar with that aspect.  We run these numbers all day, every day – and that helps us to apply concepts that help producers make good decisions. 

   Doug Johnson :

Would you share some of the key components of what you think is valuable that producers should do in a marketing plan?

Brandon Baller   

One of the things that really jumps out at me is just choosing your team of trusted advisors – whether that’s an agronomist, a seed salesman, banker, accountant, etc. and just utilizing those people to bring good information to the table and help producers make informed decisions.  The key is knowing who you want on your team and making sure that you are surrounding yourself with people you trust to help make your decisions. 

The next part then becomes figuring out how you are going to take the emotion out of the decisions.   That team can help to do that. Marketing can be a very emotional thing and there needs to be a part of the process that is objective and helps to take the emotion out of the decisions. 

Thirdly, this goes hand in hand with taking the emotion out, becomes knowing your breakevens on a farm-by-farm basis and what price point we need to be at to breakeven – not just breakeven because most people are not in the business to just breakeven. There is an ongoing need for capital expenditures.  Equipment needs to be upgraded and traded and debt that needs to be serviced. 

Following that would be knowing your risk tolerance and how it coincides with the financial position you are in.  What kind of risk are you able to take? What kind of risk do you want to take? Those are decisions that should be made jointly with the producer and the lender.  

Lastly, just make the best decision you can with the information that you have and then don’t look back.  It is easy for people to get caught up in the emotion and listening to those who try to predict the market.  Ultimately nobody knows.  We only know what is in front of us today and the facts which are in the numbers. I try to encourage people to not second-guess themselves. If a decision is good today then then it’s a good decision.  Success or failure isn’t dependent on hitting a home run.

   Doug Johnson :

With the time we have left, what is your single most important piece of advice for any producer?

Brandon Baller   

Take the emotion out of the marketing decisions you need to make because, generally speaking, it can get people into trouble.  Let the numbers speak to you.  If you have good financial information those numbers will drive the decision.  We have a saying in our bank that “we don’t make decisions for producers – we create tools to help make those decisions easier” and part of that helps to take the emotion out of the process.

   Doug Johnson :

Brandon, I really want to thank you for your time today and for sharing your insights.  I can’t emphasize enough the value that you bring to our ag industry and we all need to take steps to ensure success and sustainability for our future.  My roots personally they run very deep in agriculture with our fourth-generation family farm and building for the next generation is why we do what we do.