The Five Cs of Credit: Deciding when to loan money

A blue tractor pulling  a red disc at the edge of a field


Every day, we make decisions about what loans to make. The expectation is that every loan will be paid back, in full, and on time – careful consideration of each opportunity helps ensure that’s what happens.

So what do lenders consider? It all boils down to the “Five Cs of Credit,” which include character, capacity, capital, collateral and conditions.

1. Character. It should be no surprise that personal and professional integrity is a key consideration when someone is deciding to lend money. Are you trustworthy? Does your background support your current goals? The best way to convey your character is to look your lender in the eye and come prepared with a strong business plan.

2. Capacity. The simple question capacity asks is: will your business have sufficient cash flow to make your loan payments? You can let your lender know that you have the necessary capacity by bringing a projected income statement and statement of cash flows. Keep in mind that each lender will have different requirements for financial ratios. One of the most commonly used is Debt Coverage Ratio (DCR) – and the higher the ratio, the better (shoot for 1.2:1 or higher).

3. Capital. Capital is a measure of your net worth, which is calculated as your total assets minus your total liabilities. If your assets are limited and you have significant liabilities –other loans, for example – your capital position won’t be as strong. Different types of loans carry different capital requirements, and in some cases, capital requirements will vary based on the type of operation. If you don’t have the strongest capital position, be prepared to explain mitigating factors, such as help available from relatives, off-farm income, or FSA guarantee or participation loans.

4. Collateral. Collateral refers to assets that can be used to secure the debt – in other words, assets such as real estate or machinery that could be sold for cash to repay the debt if income isn’t sufficient. To assure your lender that you have assets to cover the debt in the worst case scenario, bring lists of your machinery and equipment and legal descriptions of real estate. Keep in mind that the useful life of your asset needs to align with the terms of your loan: a combine with one year of useful life remaining won’t be very helpful for a long-term loan.

5. Conditions. Lenders look at the conditions of the borrower and the overall economy, including within the specific industry of the borrower, and then look for ways to mitigate any risks. For example, a dry-land farmer seeking a loan in the midst of a 100-year drought could mitigate the risk of crop loss, and therefore income loss, with crop insurance.

In any lending relationship, it is critical that the borrower honor the agreed upon conditions and covenants. This increases trust, which helps with the current and possible future transactions. And as in all relationships, communication is key: let your lender know if conditions change or challenges arise. They may be able to help – even if it’s just to offer advice based on their broad financial and agricultural experience.

The importance of high-quality financial reports

Interest Calculator


It stands to reason that a financial institution determining whether or not to lend money to a business operation needs to have a clear and accurate understanding of how that operation is performing. The balance sheet and profit and loss statement — P&L statement, also known as an income statement — are two key financial reports that convey this critical information so a lender can assess the financial condition of a business. With this and other information in hand, such as tax returns and statements of cash flows, lenders can accurately assess risk and make informed credit decisions, not just about whether to make a particular loan but also how to structure it.

A balance sheet gives a summary of the assets, liabilities and equity of a business at a particular point in time. In other words, it details what a company owns, what it owes and how much has been invested in it. The P&L statement shows the company’s revenues and expenses during a given period – what money came in and what money went out. The information provided in both of these financial reports should be current, adequate and reliable.

For the balance sheet, being current will vary based on the type of loan being sought: for a term loan, such as a real estate loan, generally the balance sheet should be no more than six months old; for an operating loan it should be as close to the renewal date as possible. If more than one balance sheet is being provided, they should all cover the same time period (i.e. all dated December 31, and represent consecutive years). The profit and loss statement should encompass a full operating cycle (typically, but not always, a calendar-year); if no tax returns are being provided to support the loan application, borrowers may need to provide up to three years of P&L statements.

To be adequate, balance sheet information needs to be detailed enough that it can be verified by the lender. For example, current, intermediate and long-term assets should be segregated into industry-standard categories, such as equipment, livestock and real estate. P&L statements should include a detailed list of income and expense items, preferably either in a spreadsheet or QuickBooks format.

Balance sheet information reliability is determined primarily through verification, such as checking credit bureau reports and reviewing association records to compare with balance sheet totals for loans outstanding. For the P&L statement, the lender will conduct testing, such as comparing the submitted P&L with tax returns. The best way to assure reliability of financial statements is to have them audited, reviewed or prepared by a Certified Public Accountant (CPA). Particularly for larger or more complex loans or business operations, involving a CPA in preparing all of your financial reports, including tax returns, will go a long way to ensure their reliability and accuracy, not just for your lender but for your own peace of mind.

The amount of financial information needed will vary with the loan size, risk and complexity – as the size of the loan request increases, or the complexity of the operation being financed increases, more detailed and expansive information may be required. In addition, for very large and very complex transactions, audited financial statements may be required. This can represent a significant expense for the borrower, a justified expenditure for larger loan requests.

In addition to showing a lender the condition of a business, financial statements provide farmers and ranchers with important information on how their business is doing, and can guide their strategic operational decisions. The discipline of generating and reviewing these reports, even if no new loan is being sought, can lead to informed business decisions and long-term success.

Common hurdles to success in succession planning

Three generations of farmers gathered around farm equipment


Succession planning is something most farmers and ranchers know they ought to do to protect the agricultural operations they’ve built and to provide for their families. Unfortunately, it’s also a topic rife with emotion and that requires sometimes awkward conversations, so it’s often postponed. Below are five common reasons why a farmer or rancher will put off their succession planning, along with suggestions to resolve these issues.

  1. Giving up control. Agricultural producers work hard every day to raise the animals and crops that feed the nation. Over time, they’ve established a strategy and created processes that have contributed to their success, and it can be hard to imagine turning over the reins. As much as we don’t like to think about it, though, those reins are going to be turned over sooner or later. One way to work through this concern is to establish an LLC with the older generation as the majority decision makers, and turning over management responsibility and ownership to, the younger generation gradually over time as they prove themselves as worthy successors.

  2. Equal versus Equitable. The question of how to treat all children equitably is a challenging one – parents want to be fair to all their children, yet often can’t see how that can be accomplished when one child is working side-by-side with their parents, taking a minimum salary for decades as profits are reinvested in the operation, and another is working off-farm, earning a good salary and building a retirement fund. The first step in addressing this issue is talking about it, perhaps engaging an outside professional to facilitate what can be a difficult discussion. For example, one way to address the issue is to separate the business operation from the land on which it sits, which is often the single most valuable of the parents’ assets. The operation can then be transitioned to the family member working on the farm, and shares of the land entity can be divided equitably among the children with the farm operation controlling/leasing what it needs.

  3. Lack of mutual respect. Whenever generations work together, there are communication challenges. The older generation may believe the younger doesn’t respect their values, the work they’ve put in and the risks they’ve taken; the younger generation may believe that the older doesn’t respect their insights, education or the new ideas they bring. This creates a roadblock to succession planning that can be overcome with compromise on both sides. Often communication is the solution, so the older generation learns that the younger does, indeed, respect them and their knowledge, and the younger generation can learn that the older does admire their learning and ideas but is fearful of the perceived risk of implementing them. Once both parties understand that there is a platform of mutual respect, the transition plan can move forward.

  4. Concern over affordability. Both generations may believe that they can’t afford a transition: the older may think they won’t have enough money to support them through the end of their lives, and the younger may think that they can’t afford to buy out the operation at full price. It’s no secret that many farming operations don’t see large profits as margins may be minimal and revenues are reinvested year after year to improve operations. Effective succession planning is facilitated when profitability is strong, so this is key to a smooth transition. This will give the older generation increased savings, and create a business that the younger is optimistic about taking over. Interestingly, sometimes operations are only perceived as non-profitable, or the younger generation actually can afford to purchase it; a concrete understanding of the actual financial situation is necessary to effective succession planning.

  5. Lack of communication. Underscoring each of these hurdles is the need for open and honest conversation, but often the generations are hesitant to reveal their true thoughts because they fear judgment. The older generation may actually not want to work so hard anymore, but fear that admitting so will make them look weak. Perhaps the younger generation would prefer not to work on Sundays to spend time with their family, but fear that their father will think they’re slacking. Ignoring these issues will lead to resentment, another roadblock to planning a smooth operational transfer. The solution is to discuss needs and wants openly and honestly, sharing perspectives to create a foundation of understanding. Sometimes an outside facilitator is helpful in these efforts, at least at the beginning. Then regular meetings with established protocols support continued communication.

If you’re interested in creating a succession plan, or are just looking for more information, be sure to contact your local United FCS.

Debt structuring and loan terms

Two large grains bins


When it comes time for you to borrow money to support your agricultural operation, there are many considerations in determining what type of loan you need. As a borrower you should consider and discuss with your lender:

  • The purpose of the loan
  • Your philosophy regarding debt
  • How the loan fits your business plan and helps achieve your long-term goals

Loan terms are generally broken down into three categories: Short Term, Intermediate Term, and Long Term debts. Generally, terms should match the purpose of the loan.

Short Term Debt
Short term purposes, such as operating debt, should be kept to one operating cycle of the farm, which is typically 12 months or less. Other common short term debts include lines of credit specifically for construction of farm buildings or farm improvements, and lines of credit to feed a beef cattle herd. These purposes are short term in nature and should have some conclusion with the end of the operating cycle – harvest of the crop and resulting liquidation of the operating line, completion of construction and resulting refinance of the debt onto permanent terms, and sale of the finished cattle with resulting liquidation of the line from sales proceeds.

Intermediate Term Debt
Intermediate terms are generally used for breeding livestock and depreciable assets, those items financed with a finite useful life. These debts typically have terms between one and ten years. Terms should generally be matched to the expected life of the asset being financed. As an example, a multi-pivot irrigation system has a longer expected life than most tractors, and thus will generally have a longer debt term. Another consideration for discussion with your tax accountant is the depreciable life of the asset being financed.

Long Term Debt
Long term debts are most often reserved for real estate and fixed assets, and generally have terms of 10-30 years.

Your personal philosophy regarding debt also has a strong influence on loan terms. Some borrowers are highly debt averse, and implement rapid and aggressive debt reduction strategies through utilizing shorter terms than normal in order to reduce debt faster; for instance, financing the farm real estate over 10 years versus 20 years. Other borrowers have seemingly endless debt tolerance, and should take care that they manage liabilities to ensure that they don’t exceed the useful life of the farm assets. In other words, making sure the tractor is paid off before it is worn out beyond repair and that the cattle herd is paid off before they are beyond useful breeding life.

Loan terms can be customized with your local United FCS lender to help achieve the overall financial goals of your farm operation. The key is to have a clear understanding of what your financial goals are, and effective communication with your lender to structure liabilities in order to help you achieve these goals. Your local Farm Credit agricultural lending experts are ready to discuss your borrowing needs and help you determine the appropriate debt term for your loans.

Insurance Specialist

HIRING RANGE:       Grade 6-9 (depending on experience of candidate)

LOCATION:               Wisconsin Region — Wausau or Stevens Point office

SUPERVISOR:          Regional Vice President

This position serves the internal and external customers by providing support in meeting annual insurance sales and customer satisfaction goals. The incumbent, along with other regional relationship management staff, will develop and service the insurance portfolio (multi-peril, hail and life). The insurance specialist will provide technical guidance, including data entry and develops and assists with new client sales and existing customer service and marketing.

This is a full-time benefited position with a base office location of Wausau or Stevens Point, Wisconsin. Travel to Antigo, Wausau and Stevens Point branches to service customers in all three locations. As a non-exempt position, overtime is paid for hours worked over 40 per week.

This position requires a minimum of a two-year post-secondary education in the area of administrative support, accounting, insurance, or a closely related field with three to five years of experience in the agricultural crop insurance industry preferred. Must have or obtain the proper licenses to market all insurance products offered by the association. The successful candidate must possess good verbal/written communication, be self-motivated, accurate and detail-oriented, and have organizational and interpersonal skills to effectively maintain a high level of professionalism with FCS customers. Committed to and supportive of a team-working environment, that strives to achieve excellent customer service. Working knowledge of the Windows and Microsoft Office computer application environment.


Candidates meeting the minimum qualifications may send a cover letter & resume to:
HR Director
United FCS
PO Box 1330
Willmar, MN 56201

We are an equal opportunity employer and all qualified applicants will receive consideration for employment without regard to race, color, religion, sex, national origin, disability status, protected veteran status, or any other characteristic protected by law.

Farm to Plate: St. Patrick’s Day

A potato harvester unloads potatoes into a trailor


Every March 17 across America, people don their green attire to celebrate St. Patrick’s Day. Originally a religious observance recognizing the patron saint of Ireland, it has grown into a celebration of all things Irish.

From Shamrock, Texas to Limerick, Maine, America’s 34.7 million Irish-American citizens (along with their friends and neighbors) will watch parades, listen to Irish music, maybe drink some green beer, and enjoy traditional Irish food.

  • Corned beef: As its name implies, this St. Patrick’s Day staple starts with beef, specifically the brisket cut that is then salt-cured. Ranchers like the Bartak family and the Medlins are among the one million U.S. beef producers who together raise 94 million head of cattle.
  • Cabbage: U.S. growers harvest more than 66,000 acres of cabbage for fresh consumption like the stewed or steamed vegetables that will fill the plate come the 17th. Growers like Pete Russell and Dick Tunnell include cabbage in their diversified produce operations.
  • Potatoes: While American potato consumption has decreased in recent years, these root vegetables are still a staple on our St. Patrick’s Day plates. Roasted, boiled, mashed or fried, potatoes are a rich source of potassium as well as delivering protein for muscle development and carbohydrates for energy. Farm Credit customer Cole Vculek raises seed potatoes that he sells to his parents who use them to grow a full crop for harvest. Ron and Lisa Blach plant potatoes some years, deciding what to plant based on market demand; Alan Sackett grows his potatoes exclusively for Lays potato chips.

Whether you celebrate St. Patrick’s Day enjoying a plate of Irish food or drinking a green beer, we encourage you to take a moment to appreciate our hardworking farmers and ranchers, and above all, stay safe!

Farmers markets transcend the urban/rural divide

A variety of fresh vegetables are shown at a farmers market

By Alex Canepa, Farmers Market Coalition

No matter how you voted on election day, chances are you’ve read a headline like this: “Election Highlights a Growing Rural/Urban Divide.” In all the post-election hubbub, media outlets from the New York Times to Fox News agreed on one thing—there’s a distinct divide between urban and rural Americans.

The good news is that we’re less divided than politics sometimes makes us seem. In farming and food we have an intrinsic common interest: as the saying goes, “if you eat, you’re involved in agriculture.” We aren’t just united; the production and consumption of food illustrates at the most fundamental level that we need each other.

Indeed, at a time when our food is often shipped thousands of miles (and frequently imported), a growing number of Americans are visiting farmers markets and supporting their “neighbors,” men and women who may drive 100 miles to deliver locally grown food.

Every week, Americans in big cities, suburbs and small towns go to farmers markets not only to get the freshest food around, but also to keep local farmers and ranchers in business. While it’s easy to see why farmers markets are great for shoppers, people often forget that farmers and rural communities are half of the equation, in that they produce the food and support the farming operations that provide the bounty at the market stalls.

According to numbers recently released by the USDA, Americans spend at least $8.7 billion annually at farmers markets, CSAs, farm-to-table restaurants and other direct-to-consumer outlets. Because farmers markets operate with lower overheads and fewer middlemen than most other types of food retailers, most of the revenue directly benefits the nearly 167,000 American farmers and ranchers who sell directly to consumers.

Whether they’re beginning farmers and ranchers or established producers, the revenue stream that farmers markets provide farmers and ranchers is often the difference between making it and going out of business: according to the USDA, farmers who sell directly to consumers are more likely to stay in business than their neighbors who sell wholesale.

While it seems obvious, it bears pointing out that farms staying in business is good for rural communities. In a recent study of the fertile Sacramento region, which produces nearly $1 billion in agriculture revenue per year, a team of economists at the University of California, at Davis, discovered that, “for every dollar of sales, direct marketers are generating twice as much economic activity within the region, as compared to producers who are not involved in direct marketing.” The study goes on to reveal that for every $1 million in revenue, direct-market farms create almost 32 local jobs whereas larger wholesale growers create only 10.5.

So if you’re tired of hearing how divided our urban and rural citizens are, head to your local farmers market and experience first-hand where these two worlds meet and prosper.

To find your local farmers market in Minnesota, click here. For all farmers markets in Wisconsin, click here.

This post originally appeared on the The AGgregator.

Introduction to leasing

A man sitting in the cab of a new combine


It’s no secret that agriculture is a capital-intensive business, with land, buildings, vehicles, equipment, livestock and inputs all adding to the price tag. Especially for beginning farmers, the amount of capital needed, both upfront and on an ongoing basis, can seem insurmountable. One way to reduce this capital requirement is to lease rather than buy.

Agricultural businesses can lease a wide variety of essential components for their business: farm and ranch land, facilities like greenhouses and barns, field equipment like combines and tractors, processing and packaging equipment, grain storage facilities, vehicles, and even robots.

When you lease, you make periodic payments for the use of whatever it is you’re leasing. As with renting an apartment compared to purchasing a home, at the end of the lease you return possession of the asset to its owner (although in some cases, you may have the option to purchase the asset).

Based on what you’re leasing, the terms of your lease can vary, and some can even be set based on your preferences:

  • Length of lease
  • Frequency of payments
  • End-of-lease purchasing terms
  • Type of lease (different types of leases have different accounting implications, so work with your accounting and tax consultants to decide which is right for you)

In addition to typically lower up-front costs, leasing can deliver a number of business and financial benefits: it can improve your cash flow, help you avoid equipment obsolescence by “upgrading” equipment more frequently than you would if you purchased it, free up capital to invest elsewhere in your operation, and deliver tax advantages.

If you think leasing might be right for you, be sure to talk to your tax consultant, and also talk to your local United FCS office about leasing options available through Farm Credit.

Crop insurance basics

A rainstorm strikes a field


Crop insurance is a critical component of agriculture today, impacting not only farmers who directly participate in the program, but also local communities, businesses and lenders. Many Farm Credit System associations offer crop insurance, and according to National Crop Insurance Services, “More than 86% of insurable farmland in the United States is now protected through the Federal Crop Insurance Program.”

The Federal Crop Insurance Program

The Federal Crop Insurance Program offers risk management tools to America’s agricultural producers. Today, more than 100 commodities can be insured to protect against a multitude of perils like disease, catastrophic weather or other crop or livestock issues. With the advancement of the program, producers have many choices when it comes to purchasing insurance depending on their operation’s needs.

Federal crop insurance is administered by Approved Insurance Providers (AIPs). These AIPs contract directly with licensed agents, who work directly with the farmers to offer the products and provide the policy servicing, including the annual reporting of acres and production. Claims are submitted by the agents, but they are worked exclusively by the AIP’s adjuster team.

The Importance of the Sales Closing Date

The Sales Closing Date (SCD) is the final date that a crop insurance application can be filed, and the last date that an insured can make coverage changes to an existing policy, including adding new crops or counties. Typically, this date falls in advance of planting the crop, so that decisions are made for the year before the first seeds ever go into the ground. You can find the SCD in the Special Provisions of Insurance in your policy for each crop.

March 15th Sales Closing Deadline – What You Need to Know

March 15 is the next SCD for a large portion of the U.S., so producers should be talking with their agents now about their 2017 coverage. You should never let an SCD pass without discussing all portions of your application with your agent. The smallest detail, such as a change in the marital status of a landlord, can have detrimental impacts on coverage at claims time if not corrected.

This year also marks the introduction of many new private product offerings. These products range in type and structure depending on the insurance provider, so it is crucial to discuss these options with your agent before the SCD.

Critical policy considerations to discuss with your agent at each SCD:

  • Is the “Named Insured” on the policy correct?
  • For the “Named Insured” on the policy, is the entity correctly identified?
  • Is your previous coverage level adequate today with lower prices, and in some situations, lower APHs?
  • Is the state and county correct for all crops insured under the policy?
  • Is the Tax ID number correct for the insured entity?
  • Has there been a change in marital status for the insured? Any landlords?
  • Are all persons with a Substantial Beneficial Interest (>10%) in the insured entity listed on the policy? Does someone need to be added/deleted?
  • Is the spelling of all names correct for insureds, spouse & SBIs?
  • Is all contact information for the insured still correct? (phone, address)
  • Have you added any land since last year? Any new counties? New crops?
  • Are you farming any land that came out of CRP recently? Will you farm some that is about to be released?
  • Are you breaking any land out of native pasture, or do you have land that has not been farmed in one of the last three years?

Regardless of your experience with crop insurance, from seasoned user to first time farmer, talk to your agent before the March 15 deadline. It could make a major difference if you do suffer a significant loss.

The importance of Mexico to local agriculture

Two farm hands milking cows in a parlow


It is no secret that agriculture plays a vital role in the state economies of Minnesota and Wisconsin. In fact, both states rank in the top 10 nationally in ag receipts. But it is also no secret the importance of international trade to the upper Midwest and our industry.  

Trade was a major topic of discussion during the 2016 political season. Both Democrat and Republican candidates campaigned on the idea of reforming international trade. Two deals in particular, the Trans-Pacific Partnership and the North American Free Trade Agreement, received the majority of attention.  

After taking office in January, President Donald Trump quickly moved to back out of the TPP agreement that was reached by his predecessor. The President has also stated his intent to renegotiate NAFTA with neighboring Canada and Mexico.

In addition to potentially reworking trade, President Trump campaigned vigorously on stemming illegal migration from Mexico with the construction of a new wall along the U.S. southern border. When questioned on the expenses of a new structure, the President has floated a couple ideas, including placing tariffs on goods coming from Mexico.

The idea of tariffs has some within the ag industry worried that Mexico could retaliate with tariffs of their own, leading to a trade war. A second possibility is that Mexico turns to alternative sellers. One Mexican senator is already threatening to introduce legislation to purchase grain from Argentina and Brazil.

The implications of decisions affecting trade and immigration from Mexico loom large for Minnesota and Wisconsin. Let’s take a closer look at just how important Mexico is to agriculture within these two states.

Minnesota by the numbers:

There are over 74,500 farms in the state of Minnesota. Producers here grow a variety of crops, such as corn, soybeans, sugar beets and a host of small grains, just to name a few. The livestock industry is primarily made up of hogs, turkeys and cattle – including for both beef and dairy.

Canada and Mexico are Minnesota’s top two trade partners, accounting for over a third of all exports in 2015. Mexico’s share of imported Minnesota goods in 2015 was over $2.4 billion. Agriculture represents the number one industry for the state’s exports.

When it comes to commodity segments, the importance of Mexico shines through. According to the Minnesota Department of Agriculture, Mexico is the top buyer for corn, soybean meal and poultry products. They are also the second largest buyer of soybeans, wheat, pork and beef. The state’s dairy industry is heavily reliant on Mexico, as over one quarter of all dairy products made in Minnesota travel south of the border.

Wisconsin by the numbers:

Like their neighbors to the west, the Badger State is home to a large number of farms, coming in at just under 70,000. Agriculture is a major driving force for the state’s economy, contributing over $88 billion annually. The industry is also a large employer. Roughly 12 percent of the population works directly within ag.

Wisconsin is well diversified when it comes to commodities. Dairy is the unquestioned leader, but the state ranks first nationally in snap beans, cranberries, ginseng and silage corn. Of these commodities, more than $3.4 billion worth of agricultural products were exported from Wisconsin last year. As of 2014, Wisconsin exported nearly $1 billion in dairy products, alone!

Although Wisconsin does not export as many agricultural goods to Mexico as Minnesota, the country does serve as the number two foreign trade partner. The export value of Wisconsin agricultural products that traveled to Mexico last year totaled $360 million.  That represented a nearly 21 percent increase from 2015.  

Farm labor:

Immigrants have become key to farm labor within the U.S. Although migrant labor touches most corners of agriculture, we are going to highlight the dairy industry in particular.

A 2015 study conducted by Texas A&M University in partnership with the National Milk Producers Federation showcases just how important foreign-born workers are to the dairy industry.

A sign hanging in a dairy parlor in Spanish

The sign reads “Cows and high quality milk depend on you. Cleaned. Dedicated. Moved.

According to the study, half of all workers on U.S. dairy farms are immigrants, with the majority coming from Mexico. One-third of all dairy farms within in the U.S., of which produce 80 percent of our country’s milk, employ foreign workers.  A complete loss of such workers would result in an estimated $32 billion of lost economic output and the closure of an one-in-six dairy farms.

Efforts are being made within the dairy industry, and agriculture as a whole, to reform the U.S. guest worker visa program. This particular program is utilized by many dairy operators in order to fill staffing needs.

Mexico is a critical player in Minnesota and Wisconsin agriculture. Losing the country as a trade partner, or the labor force it provides, would present a great challenge to farmers and agribusinesses everywhere.