How To Start Crucial Conversations With Your Banker Now: Part Two
Yesterday we started a series on critical questions you should be asking your banker this year. Here’s the second part in that series. While farmers are growing more and more concerned about finances, Keith Lane, executive vice president and chief lending officer from Farm Credit Mid-America says many are struggling, but there’s still a lot of financial strength in farm country. Still, you need to be early and open to dialogue with your lender to secure operating credit in a timely manner this year. Here’s four more questions to ask your banker.
Is there any restructuring we should be doing on my balance sheet? “From a banker’s perspective, I like to see the borrower come up with a plan because it shows they are serious about making sure they’ve got short and long-term survivability,” Miller says. “Sometimes it makes sense for us to look at the structure of the balance sheet.” During times of tight cash flow, working capital is king. Your banker can help determine if moving some current liabilities “down the balance sheet” to the long-term liability category makes sense for your business.
Are we doing enough risk management? Or is there more we should be doing? “I’ve talked about risk management for the last 20-25 years because I think it's an important component,” Miller says. “Having a plan and executing on a plan again makes you a better risk for the bank.”
There are more tools than ever to manage your price risk, according to Miller. However, he’s not an advocate of saying farmers should have X% of their milk hedged at all times, because if the market isn’t giving you a profitable opportunity, there’s no benefit. “The time to do it is look forward, look at the futures market, see what those prices are and determine if you can take some of the risk off the table,” he says. “Unfortunately, it's not a one-time decision, it’s something you’ve got to be doing all the time.”
What’s going to happen to interest rates next year? The sentiment is that rates will move higher, Miller says. However, beyond next year the yield curve, which is a measurement that compares interest rates today to what they will be at various points three, five, 10, 30 years down the road, is flat as a pancake, he adds. “That’s why you've heard probably talk about another recession because when the 10-year rate is going to be lower than the 2-year rate, that is a sign that you have an inverted yield curve which can lead to a recession,” he explains.
What's the health of the bank? “Every ag sector is having difficulty, right? So, if you have a high concentration in agriculture, what is the health of the lender?” Miller says. “Asking about the health of the financial institution is a good idea.” According to Miller, despite being the 10th largest ag bank in the U.S., agriculture is less than 5% of the loans at BMO Harris, and everything else is performing well because ag tends to be counter cyclical to the rest of the general economy. “My commercial banking counterparts are having great years,” he says. “That helps because we all pick each other up. It wasn't that long ago when commercial real estate was in bad shape and our ag portfolio was doing great.” Be early and open to dialogue with your lender to secure operating credit in a timely manner this year.