•
issues or possible trade issues. This working capital
reserve may be necessary if there is a failure in
management, production, or marketing plans. Post
expansion, this metric must be at least 15 percent
of expenses.
One of my favorite ratios is term debt to EBITDA;
this ratio is calculated using all term debt divided
by EBITDA. EBITDA stands for earnings before
interest, taxes, depreciation, and amortization are
deducted. If the term debt to EBITDA ratio is
greater than 6:1 post expansion, then the growth
may be placing your business in a risky position if
any adversity were to occur over the long term.
•
Monitor the debt to asset ratio. If this ratio exceeds
50 to 60 percent, counter strategies must be
implemented. Stellar production with reasonable
costs resulting in good financial strategies will be
critical. Good cost control metrics, along with
modest family living, will also be important.
Finally, in all the growth and expansion situations
a team approach is a best management practice.
Working side-by-side with your lender and crop or
livestock consultant can provide the expertise to
navigate the economic white waters that can lead your
business to a positive destination.
Rates continue upward swing
Since the 2008-2009 recession, farmers, ranchers, agribusinesses, rural homeowners and other borrowers have enjoyed record-low interest
rates for their short- and long-term debt. The Federal Funds rate has effectively been zero from early 2009 to late 2015. The Fed Funds rate is
the short-term interest rate set by the Federal Reserve and upon which other short-term U.S. interest rates are based. However, interest rates
are rising as the Federal Reserve adjusts monetary policy. The Federal Funds rate increased once in 2015 and 2016 but three times in 2017. In
2018, rates adjusted higher four times. The chart below illustrates the effect of the Fed Funds rate increases as you see the gap between long-
term and short-term rates continues to decrease. Now is a good time for borrowers to understand and minimize the potential effect of rising
interest rates on their operations. Call your FCS Financial loan officer today to discuss interest rate risk and options available including fixed
rates.
30-Day vs-15-Year Farm Credit Bond
8.00
15 Year Farm Credit
30 Day Farm Credit
7.00
Fed Funds Target
6.00
4.00
3.00
2.00
1.00
0.00
5.00