How to Make Farm Debt Work for You: Financial Strategies for Producers: In the volatile world of agriculture, managing finances is just as critical as managing crops or livestock. Farm Director KC Sheperd recently sat down with Erin Yost—an agricultural lender and producer herself—to discuss how farmers and ranchers can make their debt work for them rather than against them.
Rule #1: You Can’t Manage What You Don’t Measure
The foundation of financial success is having a clear grasp of your own numbers. As Yost explains, “How do you know where you’re going if you don’t know where you’ve been?”.
While it is tempting to look over the fence and wonder how a neighbor is affording new equipment, Yost advises producers to turn their focus inward. By identifying specific family and operation goals, producers can find success based on their own reality rather than an outsider’s incomplete view of a neighbor’s situation.
The Three “Buckets” of Debt
Not all debt is created equal. Yost recommends categorizing debt into three distinct “buckets” to better understand how it impacts the operation:
- Productive Debt (Wealth Building): This includes investments that improve income, profitability, or asset growth, such as buying land to build long-term equity.
- Necessity Debt: This covers essential operating loans or replacements for critical assets, such as hay equipment or machinery needed to keep the farm running.
- Drag Debt: Often described as consumer or high-interest debt (like vehicle loans), this category can weigh down an operation. Yost notes that while this debt isn’t strictly forbidden, it requires a strict management plan to ensure it doesn’t hamper cash flow.
Diversification and Off-Farm Income
Diversification is a key tool for weathering market storms. Yost highlights that off-farm income is a valid and often necessary form of diversification. Citing her own experience, she noted that while her passion is full-time ranching, she and her husband utilize off-farm income to diversify and support their family ranch. She encourages producers to assess their unique skill sets to find revenue streams that reduce reliance on fluctuating cattle or crop markets.
Strengthening the Banker-Producer Relationship
A strong relationship with a loan officer is vital, especially when seeking capital for expansion. Yost, who sits on the other side of the desk as a lender, emphasizes that producers need to come prepared.
- Bring a Plan: Don’t just ask for money; present a plan that details income, expenses, and projections.
- Build Buy-In: Lenders are more likely to “buy in” to a request when the producer demonstrates a deep understanding of their own financial standing and risk management strategies.
Advice for New Producers
For those just starting out or taking over a family operation, Yost’s advice is simple: Surround yourself with good people.
Whether it is leveraging mentorships, utilizing Farm Service Agency (FSA) programs for joint financing, or consulting with experts, no producer should operate in a silo. “It might not happen how you want it to happen,” Yost says, “but make sure that you start somewhere.”.
Conclusion
Financial health in agriculture requires education and involvement. Yost encourages producers to engage with organizations like Farmers Union or other industry groups to discover resources they might not know exist. By focusing on cash flow, understanding debt structures, and building a professional network, producers can strengthen their balance sheets and keep their operations viable for the long term.
