As a farmer and business owner, sometimes it can feel like your banker speaks another language, but when you’re applying for a loan to build a new barn or buy a new piece of equipment or ground, there are a few key aspects you can focus on to improve your business and even impact your lending rates.
Management skills and financial health are two vital aspects of any successful business, we touched on these broadly in Intelligent Farmer Issue #3. This issue, we’ll dive deeper into one important aspect of managing any business:
The main reason to mitigate risk is to protect your business and ensure it is sustainable as it grows. Managing risk associated with rising interest rates, volatile markets, unpredictable weather, and various other factors is crucial to maintaining a business that provides well being to your family and your employees. For many farmers, the thought of going out of business or taking a loss provides motivation to have risk management strategies in place, but did you know that protecting your farm also makes you a better manager in the eyes of your lender?
What does the bank look for in regards to risk management on your farm?
Your account manager wants to know that you have a strategy in place, that you have a plan for years when the weather doesn’t co-operate or the markets go the wrong way. You don’t want to lose your shirt and we don’t want you to lose it either.
Six tools to protect your farm and make your banker happy too:
1. Crop insurance, Agri-Invest/ Agri-Stability, Ontario's Risk Management Program (RMP) and other government support programs: There are various support programs from the federal and provincial governments to help cover costs when things don’t go quite right.
2. Forward contracting/ Pre-paying: Price looks good? Why not consider locking it in? Whether it is the price for your finished livestock or the grain in the bin, if the price is good, forward contracting can eliminate the risk of the price dropping. Visa-versa, if the price of an input can be locked in ahead of time, you can prevent an unexpected increase to your cost of production. Both locking in prices for inputs and your finished product can help protect your profits and prevent losses.
3. Commodity hedging: Consider working with a broker to hedge the risk of increasing input costs or decreasing market prices. Though somewhat more complicated than locking in a price with a forward contract, futures and options contracts can be great tools to protect profit margins.
4. Diversification: As the old saying goes; “don’t put all your eggs in one basket.” Diversifying can be as simple as planting a variety of different crops and as complex as growing your farm into multiple sectors of agriculture. This way, if one part of your business might be taking a loss, there are other sources of income to cover expenses.
5. Foreign exchange: Canadian agriculture is heavily reliant on exports, if you’re in the business of importing or exporting, make sure you’re getting the best exchange rates and locking them in when they look good. A swing in the global economy and exchange rates could all of the sudden mean your input costs have increased significantly or your selling price has hit rock bottom.
6. Fixing interest rates: With interest rates recently trending upwards, fixing rates for longer periods of time is a strategy that some business owners are choosing to take. While there are no guarantees which way rates will trend in the next five to 10 years, locking in rates means you know how much interest you will be paying for a pre-determined period of time. You can plan around this expense and be confident your rate won’t increase during that time.
Risk is always a hot topic in agriculture, it’s the nature of the industry. Markets rise and fall, as weather changes throughout each growing season, but these swings don’t mean that your bottom line has to take a huge hit or that your business has to struggle. Try to research risk mitigation tools that may work for your farm. Your RBC Agriculture Account Manager can point you in the right direction for any of the strategies mentioned and refer you to people with-in RBC that can execute strategies around hedging, foreign exchange and fixing interest rates.