how to prepare for growth in a Downturn

Fractal CEO Ben Gordon joined Kyle Mehmen, a 5th generation corn & soybean farmer out of NE Iowa, and Dan Dempsey from AgYield for a candid discussion on why this current downturn is different and what that means for farmers looking to grow. 

Their consensus? Given current market conditions, it’s more important than ever to have a plan that allows you to maintain a strong cash position and have capital on hand to jump on those “must-have” opportunities. Added Kyle, “You need to be prepared for the downturn versus taking a ‘wait and see’ approach. Hope is really not a strategy, and it’s never going to be.”

Here are five takeaways from their conversation. You can watch the whole conversation here.

Expect more scrutiny from your banker this year

Many bankers haven’t seen a downturn like this before. Between high interest rates, more regulation, and consolidation in financial services, bankers are more anxious about risk and are digging deeper into farmer financials.

“You need to be ready to quickly answer questions like, ‘What’s your break even? What’s the difference between this entity and that one? Where’s the tax analysis? Is this a good deal for the bank?’ If you’re not prepared to answer those questions, you might get a ‘no’ on that growth opportunity. And I think there are a lot more operating notes that are at risk right now than I think any of us have faced – at least in the last 10 to 15 years.” – Dan Dempsey, AgYield

Having working capital is even more important in a downturn

Over the last six months, many farmers stayed on the sidelines waiting to see how things would play out with this year’s crop. That’s shifted rapidly and deal flow has accelerated. 

“When you’re in a downturn, no one loves the idea of growing your business – you’re barely sure you want what you have. You need to bank up some dry powder when things are good, and hopefully, you know, it’s available in a format to capitalize on deals when times are maybe not as good.” – Kyle Mehmen

Unexpected sales inevitably come up in a downturn

Kyle talked about a farm they’d been leasing for 25 years. The dad, age 92, passed away and his kids weren’t interested in keeping the farm. Having dry powder on hand ensured he didn’t lose that farm.

“You need to have the powder ready so you can act on the deal when it comes. Even though we farmed that land for 25 years and had relationships with both the dad and kids, they wanted to move quickly. That’s why speed and agility are key in land acquisition.” – Kyle Mehman

Work with your lender to explore other financial tools

In the current environment, working capital is critical to ensuring the resilience of your operation and to taking advantage of investment opportunities. Banks typically set maximum loan amounts based on the cash you have on hand and the cash flows your operation can support.

“We need to do things differently because the scope of the numbers has never been higher. Farms have never paid this much to plant a crop, and we’re in a different interest rate environment than we had  5-10 years ago. I do think there’s a shift in our industry which lends itself to being open minded to new and different products that will give you a competitive advantage.” – Dan Dempsey

Consider equity capital as a tool to strengthen your balance sheet

Between high operating costs and depressed commodity pricing, protecting cash is more important than ever. Equity capital allows you to unlock your equity while preserving your ongoing cash-flows. Use this to inject some liquidity back into your operation or help you finance new growth opportunities.

“Find me a well run operation and I will find you more opportunities to invest than capital exists. On the downside, a lot of operations might need to add a little bit of capital to create security to the operation and family legacy. For those operations that have solid cash flows, good agronomics, good margins, good risk management, Fractal can be used to essentially take a little bit of equity on the balance sheet and put it back into another part of the operation, and inject some new net dollars that can be used for growth, for stability.” – Ben Gordon

AgYield partners with growers to provide innovative financial and risk management products and services related to grain marketing. 

Note this is not investment advice. The information contained should be used for informational purposes.