Ask any FCI employee what they value most about their job, and they’ll most likely tell you it’s their relationship with you, the member-owner. These relationships are what drives FCI staff to be fully committed to helping you make the right financial decisions for your operation.
In a recent Essentials article, Aaron Johnson illustrated the importance of a lender with “staying power” and the need for transparent communications so FCI can help farm families, like yours, succeed.
FCI is committed to our members through changing economic conditions. As profit margins become tighter, important discussions with individual operations are taking place. Oftentimes these difficult – but crucial – conversations allow members to make adjustments to manage their operation and improve their viability through strategies like monitoring input costs and risk.
Managing Risk Rather than Forecasting Commodity Prices
Managing risk will allow you to lock in sales of commodities and livestock when a profit can be made. It is critical to know your actual cost of production to lock in profits instead of hoping commodity prices and/or livestock prices will continue to rise. By locking in profitable sales you can maintain and potentially build working capital, which will allow you to weather the volatility of this ag economy.
As ag economist and Virginia Tech professor emeritus Dr. David Kohl has stated many times, “Businesses that make a profit rarely go out of business.”
Maintaining Working Capital
In this current climate, FCI and many other lenders also emphasize the importance of working capital, or liquidity (the ability to pay current bills with current inventory on hand), to farmers. One of FCI’s core lending standards is the ratio of working capital to adjusted gross income (AGI), with a minimum target of 15%. AGI is your projected market value of growing crops and livestock.
Take this example:
On the balance sheet, your current assets are $400,000 (including cash on hand, savings, crop and livestock inventory at market value, and prepaid expenses). Your current liability is $250,000 (including operating loan, current accounts payable, principal payments due on term, and real estate loans). Therefore, your working capital is $150,000. In this example, your AGI is $1,000,000.
This makes your ratio of working capital ($150,000) to AGI ($1,000,000) equal to 15%. Meeting this minimum target and having adequate working capital allows you to buy discounted assets when the opportunities arise rather than be required to sell assets at a discount to pay bills. It also gives you staying power to prosper into the future.
As today’s ever-changing and unpredictable economic climate affects your operation, look to your FCI loan officer for guidance and expertise. Just as we have worked side-by-side and built relationships with generations of farm families, we are committed to your success through good and challenging times.