Farm Financial Associate Program Details

Farm Financial Associate, Norlan Hinke, shares a detailed explanation of the Farm Financial Planning Program. Norlan has extensive knowledge as a retired loan officer and bank president working with ag clients in Iowa. His perspective for producers sheds light on how today's financial situation compares to the 1980's farm crisis, what the Farm Financial Planning Program does for Iowa producers, and how producers can work better with their ag lenders. Audio along with the written transcript of his conversation addresses the following areas:

Comparison of today to the 1980's farm crisis

Audio File Transcript – Comparison of today to the 1980's farm crisis

00:00:03 Ann Johanns - Today we have Norlan Hinke, who is a farm financial specialist with Iowa State University and he's going to talk a little bit about his experience as a former, you were a bank president, right, loan officer, long history in the banking industry working with farmers across the state. And then a little bit about the work that we do with Iowa State University Extension through our Farm Financial Planning Program and the FINPACK software and service that we provide for Iowa producers.

00:00:33 Norlan Hinke - OK thanks Ann, appreciate it.
Yeah, just a little bit of background to kind of determine where I come from. I grew up on a small farm in eastern Iowa. It was the old-fashioned type farm few beef cows, few sows, fed the pigs out fat. Had some chickens, raised some corn, some oats. The area I lived in, we didn't have soybeans and made a lot of hay, so that's kind of my background there. Had a chance to attend college, my family couldn't afford to pay it. So I got lucky got an athletic scholarship and that's just been so beneficial but. Uh, kind of considered staying on the farm, but that didn't work out for various reasons. I've got about 45 plus years in banking, was a bank president for quite a number of years. Now I'm with Iowa State University as a financial specialist, I really enjoy that. My reasons for wanting to do that is that when I quit banking, I wanted to do something that was a benefit and could help people and this program is tremendously beneficial. It's got tremendous need. It unfortunately doesn't have as much usage as it has need but, hopefully we can improve that. I also want to use some skills and then supplement retirement income, of course.

00:01:52 Norlan Hinke - One of the things, I had a presentation last Monday night as a part of a series of presentations and one of the things I talked about was the comparison, because I'm old enough to have been through the 1980’s ag crisis and I thought I would cover that. It doesn't really deal with FINPACK, but there's so much stress out there today with COVID and with the derecho, just going through particularly this part of the state, there’s drought in some other parts of the state. Commodity prices are low, we've had at least three years of low commodity prices that put a significant burden on cash flow and so I thought I'd just kind of cover some differences.

00:02:35 Norlan Hinke - As to why the 80s was much, much more severe than it is now. The biggest issue was inflation. Back then, there was rampant inflation. We had come off of an embargo. There was some drought years, there was two of them, in fact. Commodity prices tanked. But inflation, inflation was skyrocketing. I moved to DeWitt, Iowa where I live now in 1981. Um, interest rates were in that 16-18% or plus range.

00:03:09 Norlan Hinke - In 1982 inflation was 13.5%, today it's 2.3%. So what was happening back then, people were stretching. Whether it was in their personal situation or the farm situation. That's just for simplistic terms. Somebody was looking at a house for $150,000. Maybe that was a stretch. But if they didn't buy it at $150 that year is probably going to be $175 the next year because of the inflation aspect.
So people were really stretching.

00:03:42 Norlan Hinke - There was a farm lender out there that was really pushing buying farms and taking on debt. A friend of mine who did not bank with me. I just knew he was solid from relationship, but didn't know his specifics, but he called me one Sunday and he said, “This lender has been visiting me and they tell me I should borrow $1,000,000 and buy some farmland. What do you think?” And I said, “Well, what do you think Pete?” And he said, “I'm nervous about it, I'm scared about it.” “Pete, you don't need me to answer it then, don't do it.” And he didn't and he stayed solid. He didn't leverage what he had. Today, he's retired and turned it over to his two sons. But that's a lot of what happened back then, is that people helping kids or others get started in farming pledged their real estate. And then, in this area lad went to $4,000 an acre back then doesn't sound like much now but it went from $1,000 to $4,000, so that's four times. And then what happened is when the ag crisis hit it dropped back to $1000.

00:04:55 Norlan Hinke - In those days, almost all land that transferred from one farm owner to another was on a retail contract between themselves. The sales contract. So maybe in other words, the seller was financing the borrower. Maybe they paid 10% down.
So let's say they bought the farm at $4,000 and they paid, let's just say $500 an acre down. So they owed $3,500 but now with the ag crisis and the commodity prices, dropping and everything else taking place, that land went down to $1,000. So there was just a tremendous amount of forfeitures of contracts. And those farmers who had financed the sale of it by keeping the money in it, ended up with land back at $1,000 an acre that was sold at $4,000. In between, in several cases, a lot of cases, they had purchased a personal residence or something else. Now they don't have the cash flow to make that happen. Rent, you know they did have some rental income, but it didn't suffice anywhere near where the cash flow of the sale of the land was. Prime rate in 1982, was 21.5%. Today, it’s 3.25%, so people that were borrowing money they were paying 16-18%, and it was on a variable rate.

00:06:17 Norlan Hinke - Generally, today. You know you can lock those farm loans in at very favorable rates. I checked the market just this week. You can lock in a 15-year farm loan at 3.6%, a 20-year at 3.8% and the 30-year at 4.15%, so that's the big, big difference is right now with low, low interest rates. Borrowing for operating with prime at three and a quarter, you're probably paying 4, maybe a little more, but not much. Back then. They were paying 16-18%.
Land, today, you can lock it in long-term. So if you've got, let's say the misfortune of having to have some carry-over debt and the good fortune of having some equity you can at least lock it in at a low interest rate. The Federal Reserve has done a lot of study about farmland values and the big factor in farmland values that's keeping it there today. One was the uncertainty of the stock market, and that's amazingly high today in comparison to what's going on with the economy. Buta lot of people transferred to farm ownership and so it drove the value up. That's kind of good news and bad news because that young person or that farmer that wants to buy the neighbors farm had to pay a lot more money for it. And so that's kind of the downside of it.

00:07:49 Norlan Hinke - But the monetary policy back in the 80s, Secretary Friedman just crammed it down and it was probably the right decision. By no respects am I criticizing him, because inflation was just out of control. Today, we don't have inflation. In fact, there's maybe a little more concerned about going to deflation.

00:08:10 Norlan Hinke - Um if you took out a home loan today. You can get it probably 3% or less. Back then, a mortgage rate on a property was over 18%. So huge difference in the interest rates, huge difference in the monetary policy. And today almost all farms that are sold, are sold on a mortgage where there's a third party lender. And so there's generally required 35% down payment, so there's a lot more equity in there and a lot more analysis of it. Every lender has their own policies, but generally, from what I see in the farming side, most lenders are about 65% loan-to-equity, I mean loan-to-sale price or assessed value/appraised valuation.

00:09:00 Norlan Hinke - But let's say your farm appraises at, I'm just going to use $10,000 'cause that's an easy number to keep track of so 65% of that is $6,500. The lender probably still is not going to loan you $6,500. Because they know and got caught in that situation in the 80s, where they had $6,500 and it went back to half of that amount or something.

00:09:27 Norlan Hinke - Um, so when you're buying land, the one thing I've noticed, many people are really, really solid in how they review it. But some look at where the grain prices were. And mostly what I'm talking about then is when let's say corn was in that four and a half, five and even up in the $6-7 range. You know it wasn't going to stay at that price.
And that just drove rents up so artificially high, which is also kind of just a side comment here. But when you're looking at buying land. You know that's a 20-year, 30-year obligations so you need to look at where the average crop values have been and where they are anticipated to be. And obviously that's a shot in the dark. But on average, you know the probability of having that extremely high sided corn and beans year-in-year-out is not gonna be so put a very, very realistic value in place.

00:10:27 Norlan Hinke - And, then when you're looking at it, make sure you’re comfortable. The biggest thing is, what’s your philosophy on debt, whether you're comfortable with it or not. There was a banking system that was Hawkeye Bank System back in the 80s. And, I thought they made a mistake. I didn't work for them. I had a friend who did, but if you had less than 40% equity in your balance sheet, in other words, if you didn't own 40% of your assets and had debt of 60% or more, you just went in a box where they didn't finance you. But there are farm customers who can handle more debt because of management skills or other skills.

00:11:14 Norlan Hinke - In general, I don't know of a farmer that doesn't have tremendous production skills. They're all very, very knowledgeable about it. There's good third party assistance out there, but where I see the biggest downfall and maybe not downfall, but weakness or where they might show the most improvement is in marketing their grain. There's so many times, I've seen, let's say that corn is at $3.72 and they will say when it gets to $4, I'm gonna sell it. And it gets to $3.98, and they happen to come in your office and you say, corn’s $3.98. Yep, but it isn't $4. And then a month or two or three later they sell it at $3.67. And, if you look at grain, I’m not an expert on it, but I think you'll see the majority of crops sold, if they're not pre-contracted, one nature another, they're sold on the down market not the up market because of a reaction.

What do the Farm Financial Associates do for Iowa producers?

Audio File Transcript – What do the Farm Financial Associates do for Iowa producers?

00:00:03 Ann Johanns - Today we have Norlan Hinke, who is a farm financial specialist with Iowa State University. He will share a little bit about the work that we do with Iowa State University Extension through our Farm Financial Planning Program and the FINPACK software and service that we provide for Iowa producers.

00:00:21 Norlan Hinke - OK thanks Ann, appreciate it.

In the FINPACK program what do we do as people that work with you? First of all, to provide value to you. So when you're looking at an opportunity and first of all, let me say it's totally confidential. The only person who's going to know about what we're talking about is the client and myself. It's not shared with Iowa State, it's not shared with anybody.

00:00:51 Ann Johanns - We don't get a list of your customers or the people, you meet with. That's something that I think is important. You don't report back the people you have a discussion with. That is, you know, we, we know how much time you've spent, but we don't know who with and that it is a very confidential discussion between you and that producer and their spouse hopefully.

00:01:12 Norlan Hinke - So it's very confidential. It's between you and me, and it's free, the price is right. What do we like to do? The first thing I like to do, in fact I just got an email this morning of a referral, and so I sent an email out first thing I like to do is get an email from you. Preferably, a telephone call and I give you my email, excuse me in my cell phone number and my email. And I just like to hear what they've got to say. What are they looking for? What do they think their needs are? If they have problems, what do they think their problems are? And, the main thing we're looking for here is actually two things.

00:01:53 Norlan Hinke - One is, what is their desired outcome? What's their main criteria? Is it to stay being a dairy farmer? Is it to get out of being a dairy farmer? Is it to continue to feed fat cattle or what? What's your desired outcome as that farm operator? And the second part of that, then is to try and build some financial stability into that plan so that we help that client have a stronger, better future. And you can always come back with repeat because again, it's confidential and it's free. So you know, I've had people who we put a plan together. They executed it. And then they've come back and anything from, it worked great, to we need to make some additional changes. because something happened because that's the way farming is.

00:02:47 Norlan Hinke - I did want to say one other thing it's confidential, but once in awhile, the borrower and being a former banker, I've had some referrals from bankers and I always tell them I'm not going to get between you two as lenders where the three of us are going to work together. But I'm going to be independent minded if I got a different idea than the banker does, I'm going tell the client and the banker and vice versa, in some cases, very few. Almost everybody just wants to take it and execute it themselves, and that's perfectly fine. But once in a while they will want a financial specialist like me to go visit their lender with them. Because maybe they're just a little more comfortable having that additional resource or that extra person sitting there to layout the plan or maybe they just feel that we could add some benefit to the explanation of things or answer questions.

00:03:45 Norlan Hinke - So, you can do three things when we get done. You can throw it out and say, I don't like any of it and that's fine. It costs you nothing and it's not going to offend me. You can take it and use it and what I try to do is in almost all cases, depending on circumstances try to look at maybe 3 alternatives so that it isn't just here's what I think you ought to do. But here's some options you might consider doing depending on where you want to go and how you feel about it.

00:04:15 Norlan Hinke What's the process?
What I'd like to do is receive a current financial statement. Ideally, I would like to receive the last three years. And in farming, it's really important, and that's probably if you're borrowing money, why your lender wants to take it about the same time every year because if you take a financial statement, let's say right now, you've got growing crops, you probably have minimal, if any carryover crop. Now, depending on where your livestock are, you know, they could be heavier. You’ve got cows with calves in the field. If you take it in January, calves probably aren't born yet, crop is in the bin, no crop in the field and so those are two totally different you really, really have to adjust.

00:05:05 Norlan Hinke - And as you know, farming is a cash, taxpaying system. so really one of the things I try to do is an informal accrual basis, so you're looking at apples to apples and really can see what's going. So that's why I like to get three year’s annual financial statement of about the same time of year if not three years, that gives me a trend. I really like to look at that trend.

00:05:32 Norlan Hinke - In the financial statement, what do I look for? The first thing I do is break it down and I do a spreadsheet and I actually, kind of old-fashioned I do use the FINPACK returns and that. But in this case, I just take a sheet of paper and I spread the years out myself. And I compare current assets to current assets liabilities to liabilities, etc., etc., on down through to net worth.

00:05:59 Norlan Hinke - On current assets, the objective is really to have a 1.25 ratio or better. If you get down to that 1.1 ratio that means that you're getting pretty tight on your cash flow.

00:06:12 Ann Johanns - For your current ratio, right? Yep, Yep, OK.

00:06:16 Norlan Hinke - And what current ratio is, is you take your current assets and you divide it by your current liabilities. So if you had, current assets of $100,000, and current liabilities of $90,000. That would be a 1.1 ratio. The reason you want a 1.25 or better, on the asset side, unless there's some extenuating circumstance like a devastating storm like this going through, which still isn't probably going to move the markets 'cause we're in an international based market and even across Iowa, you know, maybe where Ann lives is a totally different situation than where I live. Crops got hit pretty hard down here. Other parts of the state maybe didn't get hit quite so hard.

00:07:04 Ann Johanns - And they have other issues going on for 2020 and yeah, it’s a challenge.

00:07:10 Norlan Hinke - And there's always something there, but current assets probably aren't gonna move a lot, so if you got $100,000 there, it is probably going to be reasonably close to that number when you actually sell that product or in most cases that's what it would be. On the liability side, if you think about it, let's say you're making your financial statement out March 1st and May, you're in the field early and all of a sudden, the transmission goes out of that tractor and you got a $15,000-$20,000 bill. Let's go back to that guy who is $100,000 and $90,000, he just went from positive to negative. And so you like to have a lot of flexibility.

00:07:48 Norlan Hinke - Something I would point out for dairy customers and people working with dairy customers, I went round and round with Farm Service Agency and our bank auditors, because banks are audited by an internal or an external firm in addition to the regulators. But I had a very good, but a very large dairy customer on the asset side, you have assets of two weeks milk check. That's the only thing that shows up in the current asset ratio on a dairy operation. On the liability side, the way the balance sheets work it carries up 12 months payments. But when you got a pretty good size operation, there's a lot of dollars flow up from the intermediate, long-term debt to the current, and so they have a pretty considerable negative cash flow. But you have to take into consideration that they got 11 1/2 months of milk coming in there too. So just something that can skew it and be different.

00:08:47 Norlan Hinke - If you're raising calves or feeding cattle, you know they're gonna grow in value, hopefully, by putting on weight and selling at $13 or $13.50 versus $9 or $9.50 in the growing stage where you made out the statement, but on the liability side, you're going to have more feed them too, and you're gonna take corn out of your asset side and move it over to your liability side or just it's just going to come out of the asset side or you're buying feed and in there, so in anything but dairy, it's pretty much a more stable ratio.

What do today's lenders look at when working with ag clients?

Audio File Transcript – What do today's lenders look at when working with ag clients?

00:00:03 Ann Johanns - Today we have Norlan Hinke who is a farm financial specialist with Iowa State University.

00:00:09 Norlan Hinke - OK thanks Ann, appreciate it. When regulators are looking right now, they're coming into banks and your bankers or lenders are going to look at the same thing. They're going to look at three primary things right now. They're going to look at liquidity. Liquidity is working capital which is the dollar difference between your current assets and your current liabilities. So in that case we're talking about working capital was $10,000.

00:00:35 Norlan Hinke - That's not a lot of money in today's world for farming and that's a small number. I know its way off base, but lenders, regulators are going to look at working capital liquidity that is a primary issue in today's world. Second thing, they're going to be looking at is direction of net worth. Has that operation been losing net worth? Has that operation been gaining net worth? Has it just been able to stabilize in these last three or so years here, with the low commodity prices? And the other thing they're going to look at is not on the balance sheet. But what they're really looking at is a farm customer, a farmer, who is renting the bulk of the land, not owning it, locked into a long-term lease at a high rate. Because as you can see, you know corn at $3.30 something versus when it was at $4 something, pretty hard to make that $400 an acre rent workout in today's world. It just isn't there.

00:01:48 Norlan Hinke - And then I had one other thought and just kind of lost it here, oh I know what it was the other thing that's really impacting people in cash situations is back when commodity prices were really strong and profitability was really pretty likely in the farming operation, people purchased machinery to replace machinery lines, maybe put up a building, maybe did some other capital improvement, or enhancement. Tax laws are very favorable to farmers in that respect and so they took that pre-depreciation on that accelerated format and so now commodity prices are down from where they were when they bought that piece of equipment. There is no depreciation because they took the accelerated depreciation, but they still got 2-3-4-years payment on that piece of equipment and so. That's, that's a big, big impact on what lenders and regulators are looking at.

00:02:52 Norlan Hinke - Let's go back to the balance sheet. The intermediate assets. There, I just had my own rule and it's not a hard and fast rule. Other lenders may have a different one. I kind of like to see intermediate assets at least twice intermediate liabilities. Now that can be skewed to. You know, maybe you got a borrower who doesn't have any current debt other than maybe just their bills payable and maybe they own their land, and so maybe the only thing they have in current liabilities is a couple of farms they rent or something, and so the payments for that year. But they purchased some equipment and they have the cash flow to pay for it because they get favorable terms from the vendors so you can see there. You know their intermediate liabilities are going to be escalated so you’ve got to look at your own statement and take things into consideration how that might be.

00:03:50 Norlan Hinke - Next category is long term assets. I really like to see 40% or plus I refer to Hawkeye. That's not where I came up with that, but when I went to the last job I had. I had a large customer who had less than 25% equity. And when I left, not attributable of me attributable to them, they were at 45% equity. But what we did as a lender and borrower is sat down and talked about, “what do you need to focus on?” and they really needed to focus on building more net worth.

00:04:27 Norlan Hinke - A simple analogy is this. The more dollars you borrow the more sense per dollar you take in goes to the lender on interest. If you're, like when I was a bank president, there's an efficiency ratio and that's called how many cents does it cost you to make a dollar? If it's costing you $0.80 to make a dollar instead of $0.65, huge difference in your ability to create a profit. If you're paying interest out at 80% of your net worth on dollars. You get less pennies per dollar back and so that's a huge thing you might want to be looking at.

00:05:10 Norlan Hinke - I really like to see people try to target getting at that 60% plus. You'll see a lot of customers, particularly in this area, in our northern market where they own a small farm and maybe rent some and are maybe a little more diversified and you know they're at 90-95% equity, which is fantastic.

00:05:32 Norlan Hinke - Um but you still got to remember you got to cash flow out. Net worth only gives you the ability to utilize that in your retirement or in your borrowing capacity. It doesn't provide cash flow to pay the Bills and so particularly the older generation looks at it and says, “man I'm worth a million or 2 million dollars.” Yeah, you are, but you don't have any cash to pay for it or you don't have enough cash to pay it. So it's really something you need to be looking at and I would honestly say the younger generations really understand that better than the older generations do probably 'cause they needed to.

00:06:13 Norlan Hinke- Ann brought something up to me before that, I said, and I don't want to forget this, but, when I was going through the 80s. I'll just say one thing I felt really good about; in the bank I was at, which was a different bank that I retired from, we only owned one farm property, that we foreclosed on. And we only owned it for five minutes because harvester wouldn't release their second mortgage so we had to take them through foreclosure to get rid of them. We walked in. We sold the farm back to the farmer. That's one of the things I'm most proud of is that, we kept as many farmers in operation as we could, and they're still farming today or their family is. So that's kind of a cool deal.

00:06:55 Norlan Hinke - But, on the balance sheet. Quick recap. Current assets major issue is working capital 1.25. Intermediate liabilities and assets. There, the more dollars, you have that you own in equipment, the more your cash flow demand is going to be. And on net worth, a big issue and that is having a positive trend, so you're not eating up your equity so if you're for example, 58 years old, and you've got a million and a half net worth based on current values. You're not eating that up before you get to where and when you want to retire.

00:07:42 Norlan Hinke - Uh, the five things your lender looks at you probably all know this, but they look at. Capital, the collateral, the ability to have mitigated risk so that they got collateral to cover their loans and in a hog or cattle operation you kind of want to have backup because a disease could come in and devastate that. So you want to have a backup collateral basis to. Cash flow. Cash flow is the predominant today. The other one is capacity and that's where I've been talking about the balance sheet. How does that debt fit into the balance sheet. And does it work so that it's financially feasible to build it into that balance sheet? What's your credit history? Have you paid your bills, haven't you pay your bills? That's a big, big issue. And the fifth one. There's four “C’s” of credit. But the fifth one is the most important. And if you ever went through the 80s or anything else and your lender may not be saying anything but they're looking at it and that is character. If you got character. That is a huge, huge issue. I can give you an example of four people that bought a lot of properties speculating together. Two of them had a lot of net worth, the other two had paper net worth. The two that had a lot of net worth just walked on the two that didn't. And the most respect I have is, the two guys could have legitimately, legally and should have filed bankruptcy. They did not. They paid every nickel back. I can assure you those guys are going to get a loan and so character is a big, big issue.

00:09:22 Norlan Hinke - How does this process work then? So we’ll take a look at the financial statement. I'll break it down. I look at it like we did just there. Then I'll go to the income tax return and I like three years of income tax returns and I do the same thing. Spread it out. I want to go back to one more thing on balance sheet. Over my years I've come to determine there's kind of three personalities to fill out balance sheets. One is the Ultra Conservative. And that's the one that's got 50, beef cows and lists 40 because they just don't want to overstate it. Or they got 10,000 bushels of corn and they only want to list 7,500 because they don't want to overstate it so they're just ultraconservative. They're not necessarily hiding it. They're just ultra conservative.
The other one is just the opposite. They bought if a combine five years ago for $350,000. They've used it for five years and it's still on the balance sheet at $350,000. It's not going to sell it that and so as a lender, they're going to go down and look through and see, are you realistic on your values? Are you kind of aggressive on your values? I will tell you in all probability, the lender who has about conservative one is probably going to ask him, 2-3 times. “Are you sure that's all you got?” And on the other side, they're going to back those numbers down because they've got to deal with it based on what they're going see that true value be. The third customer is the one who is the middle of the road. And you know, one customer isn't better in another one, but that's the one you like to see on the balance sheet.

00:11:02 Norlan Hinke - So when you're filling it out. If that tractor is worth $100,000 value at $100, don't value it at $75, don't value it at $125, same thing with cows. On dairy cows, I kind of tend to move the value around a little bit annually. On beef cows, I try not to fluctuate too much. Because you know, let's say one year, they’re worth $800. Again, I'm exaggerating here. And the next year, they’re worth $1,200. Well, that's $400 a cow. You just moved net worth one way or the other just based on that same cow standing out there, so.

00:11:39 Norlan Hinke - And there's two forms of balance sheet you can fill out. There's the one where you use market value and the other one where you use actual earned value and that's if you bought the farm at $1,000 an acre. It’s still valued at $1,000 an acre. Lenders are going to use market value, but realistic market value.

00:12:00 Norlan Hinke – On, I’m flipping back now, I’m kind of bouncing on you guys sorry. On the income tax returns, I break it down. So I look at total revenue. How did the years of revenue compare? Now again, on a farmer’s tax return, they could change a lot you know depending on: did they sell some corn deferred, or did they hold the cattle over? Or did they pre-pay rent?

00:12:25 Norlan Hinke - I had one customer, to his disadvantage, followed the farm owner’s request, the landlord’s request, and he paid the rent the following year. He should have paid it the first year. He ended up costing him extra money doing that. And while I'm thinking about that. If you're paying $250 an acre rent and you're paying it all up front. You need to figure in the cost of doing that. Because you're paying that money up front, and if you're borrowing that money and you're paying 5% interest, that's 5% more you need to add into that rental cost. Whereas, if you're paying half up front or half at the end of the year, etc. Around here, we don't, I don't even know anybody that runs on crop shares anymore.

00:13:16 Norlan Hinke - So let's go back to the tax return. I try to get the revenue side, so it's pretty much apples to apples. In other words, did they defer a sale? Did one year, they have 300 head of cattle and another year they had 100 because they sold grain, etc., like that, and try to and that's where the communication comes in with the with the client or the borrower to see why those numbers might be different. Same thing on the expense side, I look down through the categories, fertilizer, chemical, etc, etc. Were their crop acres significantly different? If their crop acres are the same it becomes really, really easy. If they had 2 - 3 farms, they rented and lost, then you gotta take that into analysis. And what I try to do is kind of break it down so that I look at the cost per acre, not just the total aggregate dollars.

00:14:14 Norlan Hinke - And then the bottom line is, did they make a profit? Did they lose money? If they lost money, where did it come in? You know did it come in from a significant death loss? Did it come in just because commodity prices are so terribly low? It's hard to make money when it costs you $4 a bushel to put corn in and you get $3.50 back. It's just, there's only one way to make money out of that, and that's if you happen to get a tremendously high yield.

00:14:41 Norlan Hinke - In there, so that's the tax return and then I go to the pro forma cash flow, which is just the projection of income and expense. And remember the three personalities because that comes right back into play in the cash flow. And what you see a lot, especially today, you know they want to make sure that they show a cash flow that works and so you're going down through it, and where they are, I try to look at 5-year average yield on corn. I try to look at 5-year average yield on soybeans. I try to look at where their cattle numbers were. You know, do they usually sell 250 or do they usually sell 750? So that again, you're kind of trying to get a comparative analysis here.

00:15:31 Norlan Hinke - But in that process, then what you'll see is, if somebody needs to push it, they'll move the yield up to 200 because they figure it's going to be a good yield. This year, around here, that probably wasn't too far off until about 2 weeks ago (August 10, derecho) and now it's going to be way off. So try to use average yield it's your best factor. And the thing you'll find, I think young farmers don't mind cash flows, maybe too much in paperwork. Middle age and older, like, “I don't want to do that.” But after you do a pro forma cash flow or projected cash flow. Whatever you want to call it, you know about that 3rd year, 4th year, 5th year, you're starting to get pretty good at it and it really refines.

00:16:18 Norlan Hinke - Uh, and I’ll tell you where it will come into play again. I talked about this larger farmer I had, because they borrowed a lot of money, the examiners just tore that line of credit apart. Where we came into play is, that they were never late on payments, they always made their payments. But the regulators still looked at it. And where the selling point was, is that I showed them projected cash flows and I showed them year-end results and they never varied 5%. And so that allows then, when you’ve got that project for the next year, it’s pretty creditable.

00:17:01 Norlan Hinke - And again, it can change, tractor motor can blow up, storm can come through, yeah, life changes, and farming as everybody knows is a huge risk dependent on Mother Nature and so many other things, politics, world trade, dollar value. But when you’re projecting revenue, try to be realistic but conservative. When you’re projecting expenses, try to be realistic but anticipate a few more expenses because something is probably going to happen.

After the analysis and communicating with others

Audio File Transcript – After the analysis and communicating with others

00:00:03 Ann Johanns - Today we have Norlan Hinke, who is a farm financial specialist with Iowa State University. He will share details of what happens once he has met with a client through the Farm Financial Planning Program, some examples of changes producers have made in the past, and how communication plays an integral role in the success of a family farm.

00:00:21 Norlan Hinke - OK thanks Ann, appreciate it. I do my analogy of what I think. Strong points, weak points, are I don't necessarily list them that way. But I try to come up with then, what was that customer looking for? For example, a customer wanted to take over their father’s farming operation. They wanted to stay in business, but they were highly leverage. Their main concern was staying in farming, even if they had to sell a farm to pay some debts and in one case that I'm talking about, they did. But they're still farming. And, so, what I try to do is go back to that very initial conversation of and that's where we try to be very honest with each other.

00:01:07 Norlan Hinke - What do you really want to accomplish? And then I try to put at least two or three different, alternative ideas in mind. I share them, I explain them, and then it's their ball game. Again, if they tear them up, that's OK. The only thing it cost you was some time talking to me and sending me stuff. It's not going to offend me because you're the one that's running that operation. If they want to take it to their lender and they need to come back to me and talk about some things. And it's not always about the lender because, this program is for somebody who may be wants to add size to the farming operation. Maybe they want to add a son or son-in-law or a daughter or a daughter-in-law or a couple to the farm operation. That's where FINPACK can come into play because if I do that cash flow by hand, then I gotta totally redo it. If I do that cash flow on FINPACK, on a computer, I change this, I change that, I change this, and the bottom line tells me where it's at. And as long as the input is right, the outcome is going to be accurate.

00:02:20 Norlan Hinke - So FINPACK, you can use it for a huge variety of things. You know a lot of it today is about refinancing current debt. I wanted to change my page so I didn't forget some benefits of FINPACK here. You know, what's the potential changes to improve financial stability. That's the key issue with somebody who's maybe get some debt issues. Refinancing current debt, in today's world, that's a big deal. Restructuring debt, that could be a very simple thing. Very first customer I had, was really solid, but he banked with a national lender, who, all they did was set up a line of credit. At the end of the year, he paid the interest. He paid it down himself. He didn't just leave it there, but they never reviewed. You know, did he, did he do well? Didn’t he do well? They had no enterprise analysis, they just renewed the line of credit. He was a hog farmer and he was putting up some capital improvements. So some fairly significant dollars. He felt like he had carryover debt. He didn't have any carryover debt, he just had it structured wrong.

00:03:31 Norlan Hinke - So instead of, where you know, just to give an idea of an analogy, I went back to him and said if I were you, here's what I'd ask for. I'd set up a line-of-credit on purchase price of pigs, I calculate what I paid for them, I’d calculate 6 months interest and I'd set it up repayable so much ahead like that. And maybe add a few bucks, so that I'm always ahead of the ball game are at the ball game and not behind. I would set up a crop note and if he didn't sell his crop, they just flipped it into the next year. I suggested that he leave that crop note in place, extend the maturity, and repay that crop note from the previous year, which is where the purpose was, or the livestock that were sold, where that crop went into. And then I suggested he set up a capital improvement note to fund those facility improvements over a time period. You know, and he probably could have paid it off in five years. But we talked about 7 or 10 years because he can always prepay it. If hog prices, and they did unfortunately tanked. You know, if he's got it at five years and pushing it, now, he's gotta deal with that. So take a little more long-term side, because almost any lender does not have prepayment penalties. You can always prepay. And then, he had some machinery debt and he had very favorable interest rates on it., so we just left them alone.

00:05:06 Norlan Hinke - You get both sides of it, you get some people that are really, really in some tough situations. I, that's probably like 3-4 months ago, I got an email from a gentleman asking if I could help him and I said, Yeah be glad too. So we, in that initial conversation, I said, what's your objective, he said it to improve my interest rates. I said, are you having some cash flow problems, no, I can pay everything.
Cut this story short, he had three loans. He had a capital improvement loan, putting up a grain bin, he had financed through CCC. He had, I think it was 1.75% or something like that, on the 10-year rate. There's no way you're going to beat that, it was a perfect loan. Second loan was a, I think, it was a combine and it was interest free. Well, you can't beat that either. And he could cash flow it, so why would you pay interest or restructure it. And the third one was a piece of equipment it was a tillage tool, and the vendor financed it. And at that time, I think prime rate was three and a half and he was paying 4.25% Um, you're probably not going get much better than that refinancing, and he only had two years left on it. So my point is, here's a guy who's just, no situations at all, but he's looking to improve his situation, which I respected him for. But he had it there.

00:06:28 Norlan Hinke - On the other side, I've had a customer who, we put together 3 proposals and we had a 4th one in the back pocket which is the one we didn't want to use, which was liquidating some farm real estate. But, he couldn't get the lenders to agree with him on the 1st three, so he ended up going to the 4th one. Again, the good news is he still farming. He's just renting instead of owning some of the land.

00:06:57 Norlan Hinke - So you know, one of, the some of the things of FINPACK to kind of wrap up here for you. Changes in your operation, restructuring debt, manage, the big one today, managing carryover debt. Again stuff to make money, when the sale price is less than the input price.

00:07:14 Norlan Hinke – Um, maybe somebody is contemplating going into retirement. Maybe it's a Father-Son, Father-Daughter operation, and father's getting up there to be in his 60s and wants to slow down. So we can do a “what if”, uh if if we make these changes, partial or total change. Adding a family, deleting a family. Maybe somebody decides they don't want to farm anymore. What's the impact, can they take the debt over?

00:07:42 Norlan Hinke – Partial, total transfer of ownership. Some young people that parents own all the assets and the young people have a few pieces of equipment and some livestock, but they're totally dependent on the parents for the farming operation to get the crop in and get that equipment transferred over.

00:08:06 Norlan Hinke - In some cases, it's like the guy I talked about and that's that you’ve got a lender that's just not structuring debt, right. And you know, again, I told you, I'm not gonna try to get between the lender and the borrower, but, you as a farm customer and the banker is the same thing or the lenders. I say banker, there's lenders or bankers. The key things are for you as a farm customer: Number one, be able to communicate with your farm lender. If they can't talk to you about things and they only have their own ideas, they don't own the farming operation, they're just funding you. They're running their, their running the financial side of their desk. They're not running your farm operation, and so make sure any, I don't think you're going to find many like that. But you may. There's one case, I did the lender was just, I'm going to say Bullheaded. I told the borrower, if I were you, I'd look around because it’s doing you no good and you're paying the price for it.

00:09:11 Norlan Hinke - But be able to communicate with your lender. Be able to talk through situations. In today's world, something I found in the 80s, and Ann found this as a point that should be brought out and that spouses really need to communicate. In the 80s, it quite frankly, unfortunately, was not unusual that we get to a point where we have to really have a come to heart meeting, and so I would prefer to go out to the farm operation. Or maybe they wanted to come in. That was their choice, but I wanted both spouses there and the one spouse didn’t have any idea they were having problems. And so now, you gotta marital situation and you get a spousal situation.

00:09:55 Norlan Hinke - There's even other reasons for it. And that's that, you know things can happen. Somebody can get hurt. Somebody can get killed. If that other spouse has no idea what's going on all, of a sudden you got a crisis.

00:10:08 Norlan Hinke - And if they do know what's going on, at least they have a greater probability of working through it, and I would say, that I think young couples do a much better job of that communication style than people my age tended to, I guess just based on generational differences.

00:10:27 Norlan Hinke - The other thing that FINPACK can do is work with that person, and this is a general statement, but you want to build financial stability in that operation. You don't want to just solve a problem for a year, and then a year later make another problem. So you want to add value to that. As a as a farm financial specialist, first thing I want to do is focus on what does that client want? Then analyze that information and then can, we accomplish that. And if we can't, we need to talk about it and what's the next best thing to do. Going back to the lender, somebody you can communicate with, somebody that understands your operation. Doesn't do any good if they don't. And that's why right now. Excuse me in today's world. I'm not allowed to go out on the farm. Because of Iowa State's regulations with COVID. But I missed that because actually my favorite thing to do in that first meeting is to go out sit down at the kitchen table, take a drive around the farm operation, see the condition of the equipment, see the condition of the livestock, crops. Are they a good caretaker, you get a really good feel sitting across that kitchen table looking at the information, talking on the farm. Now, if they wanna meet someplace else. That's perfectly fine too. But the point is to get together and see each other and talk about it.

00:11:54 Norlan Hinke - And then that banker example would be, I had a farm customer, maybe who want to build put a silo up. If I've never been on his farm, I'm not very knowledgeable about talking to him. If I’ve been on his farm and I know where his cattle are fed and that, when he's talking about this, or that at least I got a good perception of what he's talking about. So, they need to know your business.

00:12:17 Norlan Hinke - And then the 2nd, eh, the 3rd thing is, review your financial information with them. In today's world, there's some cash flow problems out there. It's not going to do you any good to hide them because they're not going to go away. You know the old ostrich head in the sand.

00:12:34 Norlan Hinke – Uh, go up front, and talk to your lender about it. I don't know a lender around who wants to take back equipment, or cattle, or land, because they're going to lose money on it, in all probability. And also they're just if you're if you're in banking, you know, people always said you're in banking because you're in the money business, eh, 90% of bankers are in banking or lenders or at lending because they like working with people and helping people. And a good farm lender, a good lender, a good banker, cares about that customer and will work with that customer. So if you're honest with them, and you go back to that character and you go back to putting that pro forma cash flow together that's realistic and show them what you can do under normal circumstances, what you say.

00:13:22 Norlan Hinke - They're going to try to work with you. They're going to bend over backwards to work with you. And then, uh, you know, follow up. Let's say that six months, a year later, something happens come back and talk about it.

00:13:37 Norlan Hinke - That's our program. I want to add value to you. We want, we want to try to do the best we can again. It's very confidential. It's free, the cost is right. It's an excellent program and Iowa State extension offers it. And we're very fortunate they do.

Contacting an associate

Audio File Transcript – Contacting an associate

00:00:03 Ann Johanns - Today we have Norlan Hinke who is a farm financial specialist with Iowa State University.

00:00:09 Norlan Hinke - OK thanks Ann, appreciate it. And I would just say this, maybe I don't know how you put it out there, but my name is Norlan Hinke,, and my cell phone number is 563-219-5020. Anybody can call me anytime.

00:00:27 Ann Johanns - The referrals that you get, it's a mixed right that some of them come from our farm management specialists around the state, from people that they have talked with, some come from County office staff and then some people find you through the website and so where. I guess when you get through the process it can be a referral back right? Like maybe there's some other concerns on the farm and so some of our other extension specialists might, you know, you might refer them on right? That it's kind of a circle of where, beyond just the analysis like, what other things that might help improve their operation.

00:01:06 Norlan Hinke - Yeah, no, that's a good point. Ann’s looking at the big picture there. Where do my Contacts come? Some come directly from a client, potential client, some come from the County extension office. Some come from a farm management specialist that’s working with them on a particular issue.

00:01:27 Norlan Hinke - And that can reverse the other way. When I said I want to add value, you know if their crop expenses are unusually high, I may refer them back to a farm financial specialist through Iowa State or an agronomist, through their cooperative or something like that. So yeah, it's not like it's all coming from me to them. It could be coming from the farm financial management person to me and it could be going from me back to them. It could be going back to their lender. I've had lenders contact me. So yeah, it's a revolving bar. It's like anything else. You know it takes a team to make it happen.

00:02:05 Ann Johanns - You have counterparts around the state too, and that I think it's important to note to that, even though you're over in eastern Iowa, we have technology today that people can meet with you from other areas of the state that you know we can meet at an extension office is if there's a central location and that sort of thing, there's always an option.