NASHUA – In these turbulent, trying times for the U.S. diary industry, dairy producers across Iowa are wondering how to talk to their banker about their situation, what financial strategies might work and how they can make good decisions during these stressful days.
“Farmers may feel a loss of control over their chosen lifestyle, a lack of clarity about the future and not knowing whether they can prevent a total loss,” said John Baker, an attorney and specialist with the Beginning Farmer Center at Iowa State University, who spoke in Nashua at a recent “Taking Charge in Challenging Times” informational meeting for dairy producers, lenders and community leaders.
Start by thinking like a lender, said Larry Tranel, an ISU Extension dairy field specialist. “Dairy farmers should know the difference between profitability and cash flow, focus on production efficiencies and financial benchmarks, know how to keep the records needed to calculate the measures and how to interpret the measures to make informed decisions.”
This starts with these key financial statements:
Net worth statement. Also known as the balance sheet, this financial report offers a snapshot of a farm operation from Jan. 1 and Dec. 31. “This is a ‘report card’ that shows the distance between you and insolvency,” Tranel said.
Net farm income statement. This is like a video of all the year’s farm income and expenses from Jan. 1 to Dec. 31.
Cash flow statement. This includes all sources and uses of cash, both farm and non-farm. This statement can be prepared annually or monthly. “While equity is good, cash is king in times like these,” Tranel said.
To take the next steps, Tranel offered the following advice:
Put together the farm’s balance sheet from Jan. 1, 2008, and Jan. 1, 2009.
Conduct a 2008 DairyTRANS – Total Return Analysis System – from ISU, using the farm’s 2008 Schedule F to provide a base year.
Project a cash flow for 2009 with six months of data and estimate how 2009 might end up using futures milk prices. As an alternative, consider doing a financial projection for 2009 with FINPACK financial planning and analysis software.
Meet with an ISU Extension dairy team member for more information on DairyTRANS and other resources. Contacts include Christine Monday at (712) 737-4230, Dale Thoreson at (319) 267-2707 and Larry Tranel at (563) 583-6496.
While financial management is vital, it’s also critical to focus on stress management and communication skills during tough times. “The biggest lesson I learned from the farm crisis was the value of communication,” said Baker, who handled many farm debt mediations in the 1980s. “Even if you’re between a rock and a hard place, you can still figure out where you want to dig.”
When negotiating with your lender, for example, it’s important to establish goals and know what outcome you want to achieve when you meet with the banker. Start by understanding your farm’s financials to develop a realistic proposal, taking into account that lenders consider collateral, credit history, cash flow, character and production records. Make your proposal first, rather than simply waiting to hear what the banker has to say to you. Then listen carefully to the lender’s response and begin negotiating, keeping in mind that mutual protection is better than mutual destruction.
“There’s a real incentive for everyone involved to try to find a solution,” Baker said.
Whether you’re working with your lender or negotiating with family members, remember that what you bargain for is important, but how you bargain for it is more important, said Baker, who explained how the words “but” and “and” can make or break a negotiation.
“The word ‘and’ ties people together, while ‘but’ holds people apart. Think of what you’re conveying if you say, ‘I know you’re honest, but .’ You’re saying that you don’t trust the person. It’s better to say, ‘I know you’re honest, and I want to get our agreement in writing so we don’t leave anything out.'”
If it appears that it will be very difficult to get your debts down to a manageable level within three years, it may be time to consider bankruptcy. Chapter 12 bankruptcy, which was created in the 1980s, is designed to meet the unique needs of family farmers. Debts can be written down, and the debtor is given authority to continue operating the farm.
“People say they don’t want to take bankruptcy, because it will ruin their credit,” said Baker, who has seen cases where people had $80,000 of credit card debt at 27 percent interest. “If you’re at this point, however, you probably are already facing issues that are harming your credit. In times of financial distress, seek the counsel of an experienced bankruptcy attorney who understands agriculture and discuss your options.”
For information on how to manage through tough times in the dairy industry, log onto www.extension.iastate.edu/dairyteam. To contact the Iowa Concern Hotline, a confidential service where phone calls are answered 24 hours a day, seven days a week, call (800) 447-1985 or log onto www.extension.iastate.edu/iowaconcern.
Contact Darcy Dougherty Maulsby at firstname.lastname@example.org.
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