Dairy producers from across California gathered in Visalia, Calif., Tuesday to learn the dos and don’ts of working with lenders and managing through increased volatility.
Don’t think of banks as your enemy, they can be very helpful, David Frost with Frost & Partners told audience members. He said that bankers would like you to make money so they can make money.
Although the recession has been devastating, things will come back, says Frost. The bad news is you have to survive until it does.
To survive, it will take good financial management and a good banking relationship. Advice was offered by five financial advisers, including: Marc Ehlers, Bank of the West; Andy Pederson, Rabobank; Douglas Berg, Farm Credit; Vince Flanders, Umpqua, and Bob Matlick of Frazer Torbet.
Panelists said the key risks that banks will evaluate when making a dairy loan include:
- Cash flow. Is the operation historically cash flowing? What is the secondary source of loan repayment to fall back on?
- Character. Does the entity have a history of repaying loans?
- Financial management of entity. It’s not just about making 80 pounds of milk anymore. How are the finances managed? What is the dairymen’s level of financial sophistication? You can’t just be a farmer anymore.
- Communication. Does the person or business communicate with the bank on a regular basis? Will they keep the banker informed?
If you’re looking to improve banking relationships, it comes down to communication. Most bankers like information, and the more information the more comfortable the bank will feel. The financial advisers also shared this advice:
- Now is the time to pay down debt. And, it was advised to put something away for a rainy day, because that day will come.
- Don’t just create a budget and then throw it in the drawer; use it as a real working tool. Shock the budget. See what happens if the milk price is $12.50 or if it moves to $16.
- Identify risks and manage them. This will be key to success in a volatile market. And, it’s not always going to be about locking in a profit, but sometimes about locking in a minimal loss.
- Have a succession plan. Banks are looking for your exit strategy.