Financial navigation for 2023: a lender's perspective

Chris

Barron: We are grateful that you are joining us for another episode of the Ag View Pitch, as we know that your time is very valuable. Our team at Ag View Solutions is always here for you for any questions or comments that you may have. Please feel free to reach out to us at cbarron@agviewsolutions.com. And now, here is your host, Chris Barron. Welcome everybody to another episode of the Ag View Pitch. We are about to have a conversation around lending, about risk management, and a lot of things financial as we head into 2023. We have a guest with us today who is actually a lender in Illinois, Jeremy Dutch. Jeremy, how's it going?

Jeremy

Doetch: You know, and I can't complain. You know, it's January 18th and it feels like it's March 18th rather than January 18th right now. Yeah, I just hope it doesn't hurt us. You know, when springtime comes around, we're going to actually get winter.

Chris

Barron: We'll see how smart you are. People are listening to this on March 18th and see if, see if you have any good predictions when we get to— Yeah, some of the questions here. But you actually farm in Illinois as well, don't you?

Jeremy

Doetch: Yeah. Yeah. No, my, my father and I farm right now about, you know, 1,500-1,800 acres with the custom stuff that we do. We custom feed hogs. I used to have a trucking company that we in the last year unwound as my dad starts to be semi-retired. And then in addition to that, we do some pressure washing with some confinement buildings and disinfecting with, you know, that side of things for the livestock side too. So How I find time to get it all done, I guess, you know, I don't know. Everybody asks me if I ever sleep, and I do. I just, I don't know, maybe I'm, maybe I'm good at time management or something.

Chris

Barron: Yeah, well, that's good, that's good. You know, I, I'm a firm believer that, uh, those who work in the service industry, who have a touch and feel of what's going on in that industry, have a little skin in the game, I think adds credibility, adds a sense of the ability to kind of really know what's going on in the minds of your, of your clients and, and some of the why behind some of the, the visionary thinking that goes on with a lot of these executive-minded producers that happen to still be in business after lots of years of turmoil from 2013 to 2019 was a pretty tough row to hoe. And I think we're sitting in some pretty good times now, but I think during difficult times is time to shore stuff up and start to think about how do we, how do we manage this and steer the ship in the right direction when the waters get rough again here?

And I think they're going to— nobody knows when. It could be in a couple of months and it could be in a couple of years, but I think we need to be ready for it. So for sure. So with that said, I guess what I want to do is, you know, I had sent you a list of about 10 topics and I put a podcast out here a few weeks ago. Just kind of talking about, you know, the top 10 things that we want to work through during the winter. And one of them was having conversation with lenders. And what I want to start out with, with you, is just a general question on what is it that as a lender you look for for a prospective client? What are the kind of the key things that, that say, yeah, this is somebody I really want to lend money to?

Jeremy

Doetch: Yeah, no, great question. We just, we've gone through and revamped some of that as we've, we've expanded and created an ag team of lenders that are kind of under, you know, a team lead position. And, and we've just identified that specific kind of customer that we want to work with. And I think that, you know, our ideal customer is, you know, somebody that's probably around, you know, maybe Dutch Farm size, around that 1,500-1,800 acres. And higher. A couple of things that I think are really important with, you know, when we look at that of saying, is there, you know, some demographics and psychographics within that? I think we really knock it out of the park with, you know, an operation that's got some size to it. We're a small bank with a lot of power.

We've got some sister banks that allow us to lend up into some really large legal lending limits that you wouldn't expect from a small community bank like ourselves. So, you know, I think from a size-wise, we're really into that, you know, 1,000 to roughly 7,000-8,000-acre farmer on the row crop side. We've got some livestock portfolios in some dairy that we deal with as well. I think the main thing, you know, characteristically, what we're looking at is that, you know, we'd like to see some, you know, farmers that are utilizing technology.

If they have some, their father-son, you know, father-daughter, mother-daughter type team or some kind of, you know, family members, we want to work with people that have identified some form of, you know, a succession plan and are working towards that as we're starting to get to, you know, a lot of, you know, operations changing hands from one generation to the next. So, you know, I think that's, Those are some of the things that we really start with somebody that's in our, you know, kind of in our wheelhouse as far as size, utilizing technology, trying to, you know, innovate, grow, and then have succession plans. You know, in addition to that, some other things that we kind of draw down to is people are utilizing, you know, some third-party, you know, consultants such as yourself with either marketing plan or keeping, you know, your eye on the ball with, you know, cost of production.

You know, cost of machinery, things of that sort. Those are all things that, you know, if we were to say, hey, we're going to go enter into a new area, we would pull a list, you know, that have certain characteristics, just like I said to start with. You, you know, as you get in, you know, as you get into it, you know, we, we drill down to profitability and, you know, debt to assets and things on the balance sheet. But I think that's where we start. We want to deal with people that are that are, you know, main operators in the agriculture industry. They have a succession plan, they're utilizing technology, and they got a vision of where, why they want to go, and they're, they're utilizing partnerships to help them get there.

Chris

Barron: So you mentioned, um, transition and succession, and we'll get to ratios and some of the other stuff you mentioned here in a minute. But, um, transition and succession, a lot of times I think people think they have it set up and maybe there's a lot of work to do still. And it's also one of those things is like never done. If you had to look at the average producer, and it doesn't have to just be your clients, but what's your opinion of the average producer out there? You know, and maybe I'm crazy, but I think transition succession should be at the very top of the list of things to have done because you never know what can happen tomorrow. You know, the, the key person in the operation could, could instantly be out of the, out of the picture and.

A lot of times there's a lot of risk, a lot of things going on that if, if not all of the information is communicated clearly, you can take a pretty strong operation and turn it upside down in a matter of hours.

Jeremy

Doetch: Yeah, no, yeah, I mean, I would, I would echo that, you know, I think it's, I think that along with communication are some of the two underrated, you know, aspects of topics that are discussed or even, you know, top of mind within farming operations. You know, we talk about the Ag cycle, agronomy, you know, it's fun to talk about, you know, machinery and, you know, fertilizer, all the things that you're going to do to produce a better crop or be more efficient. Probably not as fun to talk about what happens if the main person is no longer there or how I transfer, you know, 40 years of my hard work to the next generation. Those aren't as fun topics,. But I, I'm with you. They've gotta be front, you know, front and center. Uh, cuz there's too many things we, we've got too much risk everywhere else to, to put this risk on the table as well.

Chris

Barron: You brought up another good one too, is communication, or, or as Shay and I call it occasionally, the lack of. Yeah. And we see that a lot where, I mean, in every operation, you take the best operation, we all struggle with communication. Um, I'm sure you guys do in your operation. We do in our operation. It's not something that Oh, you're, you're, you know, you're unique because not everybody in the business is getting along like we should or whatever. If you guys see as a— if you as a lender see team health issues in the business, does that make you as a lender want to run away?

I mean, if you see— I mean, they can have their financials together pretty good, but if they aren't getting along, if, you know, one generation to the next can't see seem to work together very good, or if you have siblings working together, or you have the threat of non-actively engaged people in the business maybe causing some trouble, um, does that, does that make you as a lender want to run away, or what's that make you— how do you handle that?

Jeremy

Doetch: Yeah, you know, I, I think, um, in a lot of aspects of the lending, uh, world, um, one of the things that you, you struggle with is trying to get in too much, you know, what you call lender's liability. Right. So, you know, so you got to walk a line of trying to be somewhat consultative but also assessing risk too, you know. And, uh, so I think for us, um, you know, I don't think it's something that, you know, we necessarily would like to say, you know, we run away from, um, but we certainly are going to want to have some conversations that, that, that kind of evolve around what, what happens if X, Y, or Z, or understanding how, you know, the ownership structure is, you know, if you were to not be able to have some resolve to this. What is that? What does that look like? Whose assets are those really flowing to? You know, who owns them?

What does it take for, you know, so, you know, to buy out a disgruntled member of, you know, an LLC or partnership, things of that sort. So we can properly assess the risk. You know, I think when we look at it, you know, management is certainly a part of how we evaluate the, you know, the credit profile and what we do to bring on new customers and ownership structure, partnerships, you know, all the things that you just alluded to are certainly aspects of their, you know, of the management ability of the company.

Chris

Barron: One last thing and then we'll get to some numbers that I want to talk to you about here. But, you know, you mentioned structure and again, you know, like I said, communication or the lack of structure or the lack of, you know, where a lot of times as farmers, We don't maybe in some cases do the best job of, you know, maybe the accounting is pretty good, but a lot of times when we start working with an operation, sometimes they have 3 or 4 different profit centers going through one checkbook. That becomes very difficult as the business grows and creates a lot of issues and challenges. And sometimes, you know, operations look at it and like, well, I'm not sure I want 3 more sets of books. I'm not sure I want a set of books for the equipment and a set of books for the trucking and a set of books for 2 more, 2 different operating entities.

But that's pretty necessary from the standpoint of getting accurate accounting. It's necessary from a standpoint of, you know, having the ability to transition something because when everything's all in one bucket, how do you know what to transition first, second, or third and then fourth? There's a, there's a lot of liability or risk mitigation. Talk a little bit about how you look at that as a lender as well.

Jeremy

Doetch: Yeah, good question. I don't know if we got enough time to really go through all of that, just that piece of it, Chris. But, you know, I think it, you know, from, you know, we're probably similar in the aspect of, you know, what we want to do is bring value to clients and what we bring to them is ability to kind of regurgitate some numbers and present them in, you know, different formats than just, you know, what a tax return looks like. And I think that what ends up happening is that, you know, when you have everything convoluted into one, one aspect or into one checking account, one LLC with multiple business enterprises, is how do you know where your cost of production is on that individual enterprise? And that's what makes it hard.

And And we even found that a little bit with Dutch Farms, you know, when we had trucks and farming and hogs all together, you know, it was kind of, you know, there was times that, you know, you're looking at it going, well, do we know that, you know, these trucks are making money? How do we know that? You know, do we know that whether or not we've got too much labor or not enough labor? And, you know, trying to figure out when the, you know, the labor is placed onto the farm, when the labor is placed onto the truck, you know, equipment repairs, you know, oil, fuel, you know, all of that kind of stuff. It's certainly easy to remember it, you know, in October when you're filling stuff up, but when you, you know, in your— or in September when you're pre-buying and doing those things.

But at the end of the year, when you start going through the GL accounts, it's a lot harder to remember which expense was what, you know, for what. And so I think, you know, to your point, if we're going to do our job the right way, you know, as being a financial consultant or a lender to help assess risk and figure out where costs, you know, costs are and breakevens, it's almost essential to break that out so that we can present accurate data.

Chris

Barron: Right. Awesome. I appreciate, appreciate that. So let's, let's get into some, some meat and potatoes here of lender-farmer relationships here and start out with probably a lot of people listening to this have already done their loan renewals for the upcoming year. There's been some risk assessment done. There's been you know, the year-end data, you know, is probably still coming in to you a lot yet, tax returns and all that kind of stuff. As a lender, though, what, what information do you absolutely need to have and what do you recommend producers bring in for that renewal and for that conversation? And then the other thing I want to say is that, you know, just because the loan renewal is done doesn't mean the relationship and the communication is done either. Yeah, any comment on all the above there?

Jeremy

Doetch: Yeah, so maybe I'll, you know, I, let me, I guess, address maybe the financials and that kind of stuff that we usually try to look at. And, you know, I think for us in the way we assess risk, I think most of the lending institutions are moving this way within the agriculture, you know, to use some form of accrued adjusted financials. So it's really important to get a 12/31 year-end balance sheet if that's your year-end, you know, for whatever reason, if you've got a different fiscal year-end, you know, we'd like to have, you know, a balance sheet every single year that's at the point of your year-end so that we can start looking over some of those, you know, current liability, current asset adjustments that we would do to help get some valuation of farm production in that specific year.

So year-end balance sheet with accurate data, On that, you know, we're listening a lot of, you know, prepaid expenses, having that inventory, trying to get as close to your, you know, where we're at with inventory equipment, you know, long-term assets, that kind of stuff. We really, I think in the ag world, a lot of the times we really start with the balance sheet year over year and then look at the income results from that year. And then we start running through our accrual adjustments. So those two things, a year-end balance sheet, a year-to-date, or, you know, fiscal year-end income statement are essential, you know, for us to get started. I think those are the first absolutely necessary things.

From there, you know, what's important to me to address kind of the ongoing conversation, you know, throughout the year is, you know, if you— I'm sure you got to put some form of crop projection, you know, projection together, crop plan, you know, for the upcoming year. And that's essential to us, you know, just to know you know, what, what your acre, acreage mix is, what your, you know, yield goals are, you know, what your price targets are, you know, and for us to be able to assess the appropriate line size and financing needs of that relationship for the, for the production of that year. The other thing that I really like to see and that we're, you know, is, is the numbers get bigger and the input costs get bigger. You know, as to, you know, all of our risk mitigating strategies.

And so, you know, some form of marketing plan that's well thought out really goes a long way, especially if we're on the larger side of, um, the line size or larger side of the farming productions. You know, I think those are imperative to help us mitigate risk and see where, where all of that's at. And then this is something I really like to see, is that, you know, some form of, um, Proposed capital expenditures. I mean, are there, you know, is there equipment that, you know, that needs to get moved, whether it's the right time to move it because still holds some value and, or if it's just something that's obsolete, you got to get, you know, you got to move to, or maybe your operation is growing. But it's nice to know that too, because I really like to know that the coming year, you know, what is our anticipated, you know, potential financing needs. And I'll build in some of that.

In some form of some, you know, maybe some pre-approvals to be able to act fast if they get the right deal during, you know, planting season or harvest season, things of that sort. So, you know, I usually try to start with those few, you know, statements. If you've got all those together, you know, from there we may find, you know, strange situations where we may ask for more information depending on the type of, you know, business it is, the type of crop operation, the, you know, different structure, multiple LLCs, things of that sort. But I think that gets us 90% of the way with, you know, the financials that we touch throughout, you know, renewal season.

Chris

Barron: One thing I'm going to ask you about here, you know, so I took some notes while you were talking, and hopefully the listeners, if they didn't take notes, go back and listen to that again and write it down. You know, the number one thing you said is an accurate balance sheet at year end that gives you a snapshot picture of where things are at. Number 2, a detailed income statement that's accurate and final, you know, then with that, that can feed into a cash flow for the upcoming year with some supporting detail of the, you know, expected yields and price objectives and those kind of things. And then just having an operating plan that leads into a marketing plan. I have those. And then your capital plan. And I think a capital plan includes 3 things, if I understood you right, is purchase, any capital purchases, any capital replacements, and any capital sales.

Just because, just because it's a capital plan doesn't mean you can't— you have to just buy stuff. It means you could sell some things too. Liquidity is important. And so Couple of things, and then I'm going to ask you about working capital and some ratios. But equipment, a lot of times on balance sheets is a big question mark and different banks do it differently. That's a frustrating thing for me. And full disclosure is we have a lot of clients in, you know, 15 or 18 different states depending on the year. And we see some different formulas for how that's reviewed. And so what we've come to is an annual appraisal of the machinery and equipment fleet every single year. So we know exactly what the depreciation is of that fleet, and we know exactly what the value is on that market value balance sheet every single year from one year to the next.

Do you see that same thing that we're seeing, is that sometimes, you know, that machinery and equipment fleet needs more detail?

Jeremy

Doetch: Oh yeah. I mean, I think that's, you know, everybody kind of values their equipment a little bit differently. And, you know, I think the one thing that we worry about from the banking institution is that, you know, if we're showing improvements to net worth, where did that come from? Is that really coming from, you know, retained earnings and earned income, or is it reevaluation of assets, you know, things of that sort? So You know, that's probably where you see a little bit of inconsistencies amongst banks and how they evaluate the machinery is, you know, whether you use it at book value minus accumulated depreciation, you know, whether it's fair market value or what.

I would love to— to be honest, I'd love to have all my customers that do, you know, machinery appraisals at the end of every year so that you know exactly where we're at from really a, you know, a market cost side of things to help with that. It's not something that I think we see unless, you know, somebody's working with a third party that does, you know, some form of compiled or reviewed statements or a, you know, a consultant such as yourself. We get a little bit of mix of everything and, you know, a lot of the times we try to take what the information is given to us to make sense of it. And again, you know, one of the things with ratios, when we get into talking about that, I think that's similar to equipment valuation is just trying to spot trends.

Is it, if you look at the historical results up to this point, if we're going from a cost to a fair market value to a book value, those, you'll see some inconsistencies. But if we, operation stays with one method of valuation year over year, we can start to, we can start to see what's been replacement costs, what's been fully depreciated, that type of thing. And I think for us, that's, That's probably the most important thing is just to make sure we're, you know, how we understand the net worth growth if there is some there.

Chris

Barron: Yeah, that's got to be a challenge for you guys on the lending side because of the inconsistencies of how a lot of us do our, our books too. So I can complain about the, about the lenders and the lenders can complain about us as producers too. So yeah, yeah. As far as leases go, I know some lenders are requiring the lease documentation and some don't at all. I think it has a lot to do from what I see with the amount of debt load, repayment capacity, you know, debt-to-asset ratio. Some of those things factor into that and then the speed from which the business is growing.

Jeremy

Doetch: Yeah.

Chris

Barron: So Is that kind of something that, you know, as operations get bigger and bigger, that that might be something that we start seeing where lenders are going to need more of that? I mean, we've seen— you can comment on this too— we've seen land rents in this last year just in the Midwest where the majority of our clients are and into the Dakotas and basically the entire Corn Belt and in some of the wheat areas We've seen land rents go up about $37 an acre on average. They don't go up as much in the far north, far south, on the edges, but in the middle part they go up a lot. And, you know, as far as the I states, we've seen about a $60 an acre average land rent increase. You know, and you see some that don't go up at all and you see some that have gone up $110 in the last 2 years and everything in between. What are you seeing for land rent? Increases in land rent scenarios?

Jeremy

Doetch: Yeah, I mean, I think, you know, that, you know, there's, there's a lot of talk out there, you know, and sometimes you don't know exactly what's true and what's not true. I haven't seen a year-over-year report yet of just land values themselves in, in the Illinois area. I know last year we were up from a land value standpoint of about 23% year over year from 2020 to 20— I'm sorry, 2021 to 2022. I think we saw land rents up about 11% as well. I think that that's been— that's going to be pushed a lot higher on the— certainly on the rent side. I think I would echo what you're saying. If it's not, you know, $50, $60 increase from a year and a half, 2 years ago, I would be shocked. There's a lot of numbers out there that are quite a bit higher than what they were a couple years ago. And so, you know, we track a little bit.

We look at a little, you know, some internal customer data, some, you know, what we call FBFM, Farm Business Farm Management data. And, you know, I think, Overall, as an average, they're up about $15, $20. I think really, you know, Class A soils are north, you know, in that $50, $60 range higher as well. So maybe that gives you a little perspective of where we sit, you know, in the northern part of Illinois as far as land rents. And so hopefully that answers kind of your question.

Chris

Barron: Yeah, yeah, it's kind of consistent, confirms what we're seeing. Next question, or discussion point for us, I'm thinking here is, you know, working capital. So you just— we just talked about land, we talked about equipment, the two largest line item expenses for most any farm business. And when we look at our cost of production in '22 versus 2023, we see a significant amount of needed working capital for this year versus last year. I think the average you know, 2,000-acre farm operation, or, or I'll put it this way, it's about $90 an acre more working capital requirement for our clients going from last year to 2023, from '22 to 2023.

So if you got to come up with another $90 an acre just to put the crop in and take it out and you're farming a couple thousand acres, you know, it's pretty easy to need another couple hundred thousand dollars either line of credit or liquidity or something. As you guys look at that, talk a little bit about working capital, kind of what you see as a necessary component for working capital with, with producers and things that we should be thinking about from that standpoint.

Jeremy

Doetch: Yeah, so maybe I can, I'll try not to really go too long in this subject, but maybe it's a subject that's worth, you know, quite a bit of discussion too. But You know, to hit on your point, I think, you know, it's funny you said 2000. You and I didn't discuss this, you know, prior to this, you know, podcast here, but we utilize a kind of an Excel spreadsheet that we put together, which we really kind of call a line size, you know, budget worksheet that takes a look at, you know, what it looks at is kind of what the borrower's yield goals are, what their outlook or price targets are. We've got some, you know, sections in there that we throw in the crop insurance, the APHs, and the guarantees and things of that sort to try to get an idea of that working capital need and or really what your, your line size should be.

And, you know, I, I don't have obviously crop insurance information that's not done yet, but we do have some Farm Doc stuff that comes out of the University of Illinois that, that's kind of their Northern Illinois average budget and You know, a couple days ago I was looking at that, and I think that overall cost of production from, you know, 2022 to 2023 is up about 10, 10.5, almost 11%, with some of the largest expenses being in your chemicals, fertilizer, fuel, and rent. Seems like the next largest after that is, you know, interest on operating, family living, seed, and the repairs.

And so, you know, I just I just took a look at a couple things and said, you know, I think, you know, for an average, you know, let's just say a 2,000-acre farmer that's, you know, got a 50/50 rotation, if we took today's, you know, today's, you know, Dec futures price minus, you know, 20, you know, 20-cent basis, you know, we're looking at somewhere around a, you know, a $5.85, you know, breakeven price on that with about 198-bushel yield. And about 1360 and 62 for bean, you know, yield for beans. And so I kind of just totaled all this up and thought, you know, I think our farmers had a pretty good year last year. You know, I think they're sitting on some pretty good working capital.

But, you know, when you look at this from a cost of production, I'm kind of coming up with numbers in that, you know, $1,100, you know, an acre for corn to $1,200 depending on the different operation and how their structure is around that 8, $8 to $8.50 in soybeans. And so you start to see what you're talking about, the working capital needs really increasing. And so for us, you know, I don't know that we necessarily say it's a percentage of gross sales or anything like that. You know, one of the things that I really like to look at is to know when we, when we put together our crop budget, where is that coming from? Is that coming from, you know, working capital coming from the line of credit that they have with us? And/or cash, or a combination of both. And so, you know, when you look at that, you say, okay, well, what's the cost of production? What's our expected revenue?

And then where we start to really get concerned is if there's any shortfalls, you know, you'd mentioned coming off the supercycle in 2012, there was certainly periods of time in those years where, you know, we had costs that exceeded revenues. And so we've, we've really kind of taken a page out of Dr. Kohl's book on, on looking at burn rates. And so if you stress the, if you stress the crop plan a little bit, you know, if we stress it based on whether it's a yield expectation, or we stress the price, or, you know, sometimes maybe even stress the interest rate, you know, as we're in the rate environment we're in right now, if we start getting into negative working capital or in those situations where you got to utilize some working capital to get to the end of the year with just your expectations, that how far is that burn rate really going to be based on your working capital?

So if we've got a deficiency, how long forward can you operate? And I think we look at it and say, you know, if you can operate based on today, if you can operate 3 to 5 years forward, with some stress scenarios, that's pretty ideal. That's pretty good. You know, 2+ years, that's pretty good. Under, you know, under 2 years, you know, we really need to start looking at what's the right, you know, what's the right thing to do. Do we've got some, you know, things that we need to move down the balance sheet? You know, do we have permanent working capital in there that we can, you know, pull some equity out of some real estate, right-size the balance sheet a little bit?

And if it's less than a year, you know, we're putting, you know, put budgets together and, you know, we can't show how we're gonna, you know, pay for all the, you know, $1,100 an acre, you know, production, you know, based on gross revenues and you don't have the working capital or cash to support that, you know, then that really starts becoming concerning. So, you know, a couple things, you know, you had brought up leases and equipment and, you know, obviously we're changing a little bit of our tune. We've gotten partnered up with the leasing company, that leases some equipment, leases some fixtures such as grain bins, grain dryers and things of that sort. And, and I think there's a little bit of a, you know, one of the things we've learned from this coming off the supercycle is that, you know, working capital is extremely important.

It's going to help us live forward, you know, if we come into tough times. And, you know, it's kind of funny, you know, the bank will say we want 30% down for you to put your new grain facility up. And then 3 years later, if you don't have any working capital, we'll come back to you and say, where'd your, all your working capital go? And they're like, well, Part of it was a 30% need for one of them, right? And so we've, we've done a, um, we've just been lucky enough to run across a company that does some financing for those. Um, and they, they've allowed us a little bit opportunity to, to fund some of their financing needs on the backside of those leases so that we aren't, you know, extremely out of a credit relationship opportunity, but it does help to preserve working capital. It does help for you to expand.

And, and I think those are some of the things that, you know, as we move forward into, you know, larger dollars, more uncertainty, more risk, I think some of those got to be on the table if you're wanting to expand and upgrade. Sometimes it does make sense to lease some of those and let us be a partner on the backside of that lease if we still want to continue to grow the relationship. But I think for us, you know, a lot of it is, is a burn ratio that we really are concerned with. Obviously trends are, are another, you know, thing that we look at. Is it, you know, are we trending in the right way with working capital? Are we not? You know, those all lead to further discussions as to, you know, what's really going on. Is it, was it a pricing option, you know, that, that we just, where we, we lost some traction, you know, on the current asset, current liability side?

Is it been equipment purchases that just really need to come off and get placed more on the intermediate long-term side of things. Um, once we start trending that out with the burn ratios, we have probably more in-depth conversations.

Chris

Barron: You brought up, uh, you know, those intermediate purchases, which I'll go right back to equipment because it's the second largest line item expense. It's the most entertaining thing for farmers to buy, spend money on. And then when you have a really good year, and you're in the middle of harvest and you realize where your efficiencies aren't and you're like, well, if I would just buy that grain cart, or if I would just buy that corn head, or if I would just buy that cotton picker, or whatever it is, wherever you're at, there's always a lot of needs and wants and wishes, and there's only a limited amount of cash, a limited amount of capital. What makes you feel comfortable, you know, or you know, how do you handle that or how are you viewing that?

Because we went from 2013 to 2019, most operations, and really weren't able to keep their fleet as current as maybe some of them should have. And then they're kind of trying to play catch-up. But you got to balance that between liquidity or, you know, your working capital position. And then not only that, is in the next couple of years when you run a stress test, like you said, all of a sudden you have principal and interest payments that could easily exceed the revenue or the cash flow. Then that's when you're talking this restructure stuff. So when all that happens— I'm getting to a question here, trust me. So when all that, when all that happens, how do you How do you look at that as a lender to get that restructured in a way that, you know, is going to kind of work from a cash flow perspective?

Because if you're looking at debt-to-asset ratio, you better have a pretty strong debt-to-asset ratio to start with because cash flow is the name of the game.

Jeremy

Doetch: Yeah. No, I think you hit the nail on the head. I mean, I think that that's where we start, is that You know, is there enough equity to even do this? You know, if you've gotten to the point where, you know, you may have put off capital purchases and replacements and you're in a need of turning over the whole line of machinery, you know, do you have enough, you know, equity in there to be able to do it and still stay healthy on the balance sheet? You know, debt-to-asset ratio is probably one of our most watched ratio besides, you know, our debt service, requirement or debt service coverage ratio. Just because, you know, I think that there's a lot of people that remember the '80s. And, you know, I think you could go back to almost any business. It's not exclusive to agriculture.

But, you know, when you come through ups and downs in the cash flow, what saves you is the ability to live forward without having a ton of obligations. And so, you know, that debt-to-asset ratio becomes important. That you're not overleveraged where you couldn't restructure. And you, you know, and so I think, um, that's a good starting point is to say, you know, do we have enough, um, you know, enough equity in the balance sheet to really go through some of these restructures? And if we don't, um, are there some partners that we can partner with to mitigate some of that risk, to provide us, you know, some guarantees to help us make— be comfortable with it, you know, as long as the cash flow can still, you know, support it.

And so I think those are kind of two really, you know, parts of the financial reporting that we really massage and look at is that, you know, can it, you know, can the operation support the additional debt payments that we may do? And can the, you know, is the leverage acceptable? And sometimes it works really, really well, and you can do that because there's, you know, some equity in land and you can stretch out a little bit longer over than just 5 years, and you can really, you provide some cash flow relief. And then there's some operations where you, you know, you just, you really can't. And so then there's tough conversations about what does the farm look like in 3, 4 years from now? You know, how do we, how do we be proactive with, um, you know, the right restructures to, to make sure that it still stays around? Um, there's been a lot of different ways that we've done that.

You know, we've done it through selling some equipment, leasing some stuff. We've done it through some sale-leaseback of, you know, some land, things of that sort to just try to get some equity back into the— or liquidity back into the farm. But every situation on that side is different. And I think every restructure that we did coming off the supercycle was a little bit different, but it really came down to cash flow and leverage of the balance sheet.

Chris

Barron: Yeah, and restructure isn't necessarily a bad thing. We had a lot of clients that restructured because of anticipating interest rate increases and everything to increase liquidity. Um, but with that said, um, that takes some discipline, doesn't it? Because all of a sudden you have a bunch more cash. Yeah, when you have more money, what's— what can happen? You know, sometimes we spend it, you know. And so how do you— how do you handle the discipline conversation? Or is that a conversation you have with some of your clients when that restructure is done.

Jeremy

Doetch: Yeah, I think so. You know, the, you know, the ones that we do that are more proactive in anticipation, you know, a lot of the times we just kind of talk through what the plan is. I think that, you know, those tend to be some operators that really have their hand on, you know, where their operation is. They have their hand, you know, their thumb on the pulse of the ag economy. You can see You know, they subscribe to a lot of different, you know, MarketWatch type stuff. And so I think they're disciplined enough. And the majority of the people that I work with that have been proactive in that situation are saying we want it because we think we're going to need it due to increased costs. They're not out there, you know, spending a bunch of money, you know, got new paint disease and trying to redo the fleet that way.

I think it becomes tougher where, you know, you do a restructure because somebody was undisciplined, undisciplined with their line of credit. You know, it's easy to, you know, buy the equipment on the line, you know, you know, you're selling grain in November to make, you know, second half rents and things of that sort that the line was for. And, you know, you get optimistic that, well, you know, I'm gonna, you know, I can, I can really improve my per acre return this year and cycle that through. And after a couple years of equipment purchases on the line and you know, not being able to hit that home run, you know, it's really a tough conversation about it. It's really time to start moving this down the balance sheet and doing it so that you're getting ahead on, you know, the, the, you know, net worth of the company rather than just keeping it as a current liability too.

And so those, you know, I think that's the, for me, that's really the name of the game is if you've, if you've got somebody that's having a hard time wrapping their head around the restructure, you know, it's really something we're trying to do to help improve your balance sheet and your leverage position 5 years from now. You know, if it's an issue where you've got too much just sitting on the line. Yeah.

Chris

Barron: So adding to that or kind of heading into another area that we kind of covered, but yet I want to, I want to review this again on, you know, you mentioned a 10% increase in cost from 2022 to 2023. That's about exactly what we're seeing. Inflation last year across the board, we had about a 22% or what ended up overall was right at about 20% increase from '21 to '22. Now we're seeing about a 10%. Well, there's a 30% increase to operate, you know, to put a crop in and take it out versus a couple of years ago. One of the other line items that I want to address for a minute here is what we call return to management and profit manager, it's all of those overhead expenses. So it's healthcare, it's, you know, vehicles, it's owner draws, it's, you know, your payroll, it's, you know, kids in college. You know, I kind of jokingly say sometimes accidentally bought a boat.

You know, I mean, there's, there's these things that get purchased during good times because we don't always make the best decision during good times. What are you seeing from an overhead cost increase currently right now? I think we're at— I don't have the numbers right in front of me, but I think we're at like 13% increase. Last year that line item was up 22%. About 16% of it was inflationary. The balance was increased spending. This year we're seeing of the 13%, somewhere in the neighborhood of about half of it, it looks like, is still inflationary. A lot of it's food. You know, people can't go to the grocery store with a family of 4 anymore without spending $300. And, you know, gas and those things have come down. But the other half of that's increased spending. So, you know, about 10% of that line item is just increased spending over the last couple of years. What are you seeing?

Is that similar to what you're seeing? Yeah. What are you seeing?

Jeremy

Doetch: Yeah, I would say it's, you know, we kind of, you know, In the banking world, we really call it family living, and that can get a little convoluted as to what really is family living and what's not. You know, if you get a good operation that's paying themselves and you know what that is and they're living within what that draw is, you can get that pretty easy. But I think that, um, you know, on average, I think the average cost, uh, or the average, um, reported family living expense within, you know, crops in Northern Illinois was around that $77,000 last year. I think this year it's projected to be closer to about $98,000 to $100,000.

So, you know, maybe we were a little bit slow, um, in recognizing some of that and all of the costs from '21 to '22, because we're, we're probably closer to, if those numbers are accurate, right, closer to a 25% increase, um,, you know, or just, you know, slightly over 20% increase. But I think we might, might have been, you know, Illinois and some of the Farm Doc numbers and FBFM numbers, we might have been a little late to the table on, on looking at it year over year. So I think overall, you know, we're seeing about a 20 to 25% increase for over the last couple years of just family living needs, whether that's inflationary, whether that's spending, you know, things of that sort. So I think it's right in line with what you're talking about here.

Chris

Barron: And we look at it in terms of cost per acre. And again, I forgot to print that out here and have it right in front of me. But I think we're right around about $90, $91-something an acre for overhead costs. But we plug into that thing, you know, more than just what, you know, maybe you would call family living. We got, you know, electric bills and the fuel for the vehicles. And, you know, there's a pretty long list of items. And the range that we see in that category is pretty astonishing. I mean, on the low end, I think we're in that mid-$30 an acre range, because there's, you know, supplemental income coming from off the farm. And then on the other hand, you got an operation that doesn't have any debt and owns all the land they farm, and they're taking that, that category is $250 an acre or whatever, because they're pulling that, those profits out of that category.

So the range is pretty wide, but I appreciate your, your two cents on that. As we get close to wrapping up here, there's probably a couple things that I had thrown you as questions. Maybe is there anything that, that I didn't ask you that you were prepared for that you thought, you know, maybe we should, should hit on that, that I didn't, um, you know, one thing I, I can think of off the top of my list there was cost of production, but I'll shut up for a second and see if you had anything.

Jeremy

Doetch: Yeah, no, um, you know, I think, uh, you know, you had shot me a little bit about ratios, maybe, uh, you know, the I would say is some of the, some of the 3 ratios that we kind of look at, you know, trend out. This isn't, you know, obviously the full extensive list, but some of the 3 that are probably most important to us would be the first one is a debt service coverage ratio. In the ag world, I've heard it, you know, called DCRC, you know, capital debt repayment replacement capacity, that kind of thing. But we're basically what we're looking at it, you know, for really simplistic purposes, we're just saying, you know, for every dollar of debt payments you have, we want a certain ratio above that that's generated in income and cash activities. I think that, you know, for us, we get real comfortable at, you know, 1.15 or higher ratio, you know, that we'd really like to see.

Some years we see Depending on what kind of financials and, you know, whether it's a cash basis tax return that we're looking at or whether we have accrued financial statements, you know, those numbers can be a little bit skewed. Sometimes we trend that out over a 3-year average depending on what we have, but we'd like to see, you know, for simplistic purposes, if you have a dollar of debt payments, we'd like to see it at the very least generate about $1.15 in revenue to match that.

Chris

Barron: From a simplistic standpoint, dumb question, but I'm going to ask it because And it's not a dumb question. It just— so you, so you're taking the, the total debt and dividing that by the income to get your ratio.

Jeremy

Doetch: Yeah. Yeah.

Chris

Barron: Just making sure that's clear for the—

Jeremy

Doetch: yeah, yeah, yeah. No, you know what? It's a good, good, good observation. So, you know, sometimes, you know, us in the lending world, we get so used to, you know, dealing with this ratio, you know, how do you calculate it? You know, we really Really, you start with your net income and then add, you know, non-cash items back like depreciation, amortization, you know, one-time expenses, things of that sort, and back your interest expense so you don't double count it on the, you know, divide, you know, dividing of the annual payment. But we really, really start there and we come up with a number that's, you know, your actual cash to service debt, and then you divide that by the annual payments and that gives you your ratio.

Okay, so that, that's number one, you know, I think if, you know, that's their, their, our— if we were to say, hey, you can only look at one ratio, that would be the one ratio that I would absolutely have to look at. And then from there, I'd be looking at a current ratio, you know, obviously we'd like to see it at the very least a 1-to-1 ratio. We'd like to see it a lot higher to build working capital, but, you know, when you start getting into negative working capital. That's when we start looking at, again, permanent working capital that's on the line, equipment purchases, things of that sort. So that one's important to us to just trend out and look at and say, you know, is there things that are stagnant on the line, or are there, you know, things that are going on in the current side of the balance sheet that we need to address? And then the last ratio is that debt-to-asset ratio.

It just shows us kind of the overall health and leverage of the operation and you know, really, I think 30% or lower debt-to-assets, pretty darn good. I think you're doing really good in today's day and age. We think 30, you know, we see a lot of operators, you know, somewhere between that 30 to 50% range depending on their size, you know, the, the how new the company is, how new the equipment is, you know, land purchases, that type of stuff. And then if we get above 50% debt-to-asset ratio, we'll start to, you know, really talk about what's going on, what's the long-term plan, do we need to, you know, what's really kind of why we have this leverage out there and that type of stuff. And sometimes there's a really good use, you know, reason for it. Sometimes there's a, you know, there's just been a buyout and it's on short amortization and it's going to work itself through.

And then other times it's, you know, it's signs of, you know, larger problems at hand. So You know, those— I know you were wanting me to maybe go over some ratios and things that we look at in the bank, and I'd say those are our top 3 that we really look at.

Chris

Barron: One question on those ratios. So you— on the debt-to-asset ratio drives a lot of stuff. And so if, if that is in line, I guess the question I have is how do you handle or how as a lender or as a producer do you view land? Because when you're looking at that balance sheet at the end of the year, you don't want to be changing land because that's not earned equity unless you sell it. So what we tend to do is we have a set number on the land, and maybe you'll make an incremental adjustment every, every 10 years or something. And I don't like seeing that done very often, if ever, just because you don't ever know what could happen to those land values. And so I think it's tempting for some people to, to maybe want to make those land adjustments on the balance sheet. You have to separate that out though from the difference between earned equity and quote-unquote market value.

So do you look at like a market value balance sheet and then also an earned equity balance sheet?

Jeremy

Doetch: Yeah, we certainly do if they both are provided. Um, again, you know, Chris, I think this is where, you know, for us, when we look back and we say, if you've been giving us a consistent similar balance sheet year over year, I can start to trend out whether, you know, you're, you're giving me, you know, a steady value of the land, or if you're starting to show appreciation in the land. Um, you know, for me, I, you could call it kind of whatever you want for a balance sheet, but if it's, if you're always doing it in the same method and I've got a few years worth of history, I can start seeing some trends and things of that sort. You know, I guess on the flip side, you know, this is really kind of an interesting topic on land.

And the president of our bank, you know, we're really lucky because, you know, I'm a farmer, I, the chief lending officer grew up on a farm, the president of the bank grew up on a farm. I mean, we're really, we're really invested into the ag industry. And we've had it, we had a conversation about 3, 4 months ago, about just land values and how much debt per acre, you know, we would be comfortable with because, you know, to the inverse of your, your conversation of debt to asset with land, we kind of look at it, you know, on the side of, of good years, bad years, and utilizing land and how you get, you get over some of that stuff. And so, you know, I know that some, we have some producers that will come into a year that you've had some really great, you know, margin and you've done really good. And so they'll take it and they'll pay, they'll pay a farm off.

And, you know, make them feel really good about paying that farm off. But then, 3 years later, all of a sudden you're having to go borrow against it for the, you know, the amount of working capital that you robbed to go pay that farm off. And so, you know, we were coming up with a conversation that just said, you know, at what level are we comfortable? You know, and the president of the bank threw this out and he's like, you know, is there a level that we're comfortable? So if you get your debt down to a certain level that we don't really, you know, care if you ever pay your land off, because it just seems to be a, you know, a little bit of a cyclical pattern. At times on being really aggressive at paying debt off in good times, but then you're borrowing some of it back, you know, in tighter times. So, you know, is there a better kind of better mix of, of how to handle that?

And it was an interesting conversation that we had, but it's kind of the opposite of the debt-to-asset topic, you know, here. So I thought it was maybe worth at least mentioning.

Chris

Barron: I love that because I've had a number of conversations with Sometimes with younger producers, if there's a father-son operation or, you know, the older generations trying to pay the debt off, the younger generations trying to grow the business. Yeah. And as the business grows, in my observation, I've done this for 27 years now, looking at financials and looking at, you know, cash flows and everything, balance sheets and stuff. And it's interesting to me, you know, some of the operations that I worked with years and years ago have way more debt now than they had 15 years ago, but they also have a huge amount more equity. And so if you sat there and only worried about your debt, you would never grow.

Yeah, because I can show you operations that, you know, 15 years ago had, you know, maybe $1 million or $2 million worth of debt that have $15 million worth of debt now, but their asset and their debt-to-asset ratio is in line So you sit there and just look at debt, you would never grow. And I think that's what happens to a lot of farm operations as they mature. And the senior party wants to pay the debt off because they don't want the debt. And the next generation's like, well, we got to grow and we got to use that leverage and have to assume some risk. And I think that sometimes when you, you talk about the lack of a transition plan, we're kind of going back full circle again here.

Jeremy

Doetch: Yeah. Exactly.

Chris

Barron: But the lack of communication, the lack of a transition plan, and the lack of, of thinking big picture and having the trust in each other and clearly defined roles, responsibilities, and discussions, I think really fixes a lot of that stuff.

Jeremy

Doetch: Yep, absolutely. You hit, I think you hit the nail on the head that, that we were just talking about a couple months ago. Is it, you know, what, what's the right mix? Because you, you know, If you just focus on debt, you're at some point or another, your assets aren't going to return and be returning you what they want, or you're going to phase yourself out by not staying right.

Chris

Barron: Well, hopefully everybody is listening to this part of the conversation.

Jeremy

Doetch: You know, this is—

Chris

Barron: we got to the meat and potatoes of the heart of, I think, a lot of this as we kind of wrap this back in full circle. I think we've had a phenomenal conversation here. You've got a lot of really good content, really threw out a lot of really good things for our listeners to think about. And I think these conversations with our lenders need to be ongoing. It's not just at renewal time, it's through the course of the whole year. And, and really appreciate your time and really appreciate your expertise in this area.

Jeremy

Doetch: Yeah, no, Chris, I appreciate you having me on. Be happy to do it any time.

Chris

Barron: Yeah, well, we'll, we'll, we'll be careful what you ask for because you're probably going to get it. So But again, really appreciate it. Jeremy Dutch, and you're with German American Bank in Illinois and a farmer. And again, thank you very much. Really appreciate it. Thank you. Yeah. And thanks, everybody, for listening. And I hope this was useful to you. And we will be coming back to you with a couple of these other podcasts with some good information based off of the 10 topics that we want to get handled as we head towards spring. So with that said, thanks everybody, and we will catch you again next time on the Ag View Pitch.