January 8, 2018
FINANCIAL MANAGEMENT STRATEGIES FOR 2018
Projected profit margins for crop production in 2018 are likely to be at or below “breakeven levels” for many producers. Costs for some crop inputs, such as fertilizer and fuel, have declined slightly in the past couple of years, as have land rental rates in some areas; however, crop revenues for many producers have declined at an even greater rate. It appears that low commodity prices and lower gross revenue levels in corn and soybean production will likely continue for the 2018 crop year. The profit margins in the livestock sector improved somewhat in 2017, but were quite variable, which is a trend that is also likely to continue in 2018. Credit availability for agriculture should remain good for farm businesses that are on a solid financial base; however, credit could get much tighter for farm businesses that are in a “higher-risk” financial position.
Following are some financial strategies for farm businesses to consider during these highly volatile and potential stressful financial times in the farming business:
- Keep the “Current Position” (cash available) segment of the farm business strong.
- Pay attention to the level of “Working Capital” and the “Current Ratio” on your Farm Financial Statement. If there is a big decline, it could signal some financial concerns for the farm business.
- It is usually a better option to use excess cash revenues from the farm operation to pay down short-term farm operating debt, rather than to make extra payment on term loans.
- If there are any excess crop revenues from 2017 grain sales beyond repayment of the 2017 Farm Operating Loan, it is probably best to prepay some 2018 or 2019 crop expenses.
- Remember to account for CCC grain loans, financing with crop input suppliers, short-term loans from family members, etc. when analyzing the Working Capital for the farm operation.
- Look at ways to reduce production costs and other expenses.
- Try to be a “low-cost” producer …… thoroughly analyze seed, fertilizer, chemical, etc. crop expense decisions for 2018 crop production, and look for ways to manage those input costs.
- Be cautious when making reductions in crop production costs, so not to significantly impact yield potential …… optimizing crop yields is still important to the “bottom-line”.
- Carefully analyze more expensive cash rental rates on rented land, and if the rates are not profitable, try to negotiate lower rental rates, or possibly give up some high rent land.
- Negotiate “flexible lease” contracts with agreeable landlords that sets a manageable base rental rate, with the opportunity for a higher final rental rate, if final crop prices and/or yields increase.
- Review all other direct and overhead expenses in the farm operation, and look for any ways to make reductions.
- Review other ways to manage financial risk.
- “Fine-tune” the farm’s grain marketing plan, based on the “cost of production”, which is updated regularly, and have set price targets and deadline dates as part of the marketing plan.
- Don’t get caught up in the “market hype or chatter” …… pay attention to how changes in the corn and soybean market prices affect your own farm business.
- Look for “profit margin” opportunities in crop and livestock production, and take advantage to “lock-in” both cash expenses and market prices when those margins exist.
- Take time to analyze the best crop insurance strategies for your farm operation in 2018 …… cutting crop insurance coverage may not be the best risk management strategy.
- Excessive spending for family living and non-farm expenditures can be a “hidden expense” in the farm business. Include the non-farm income and expenses, and other family living expenditures, in farm cash flow planning.
- Pay attention to the repayment ability on Term Debt Loans.
- In addition to declining Working Capital, a low “Term Debt Coverage Ratio” is a common sign of financial stress in a farm business. This ratio is the cash available for debt repayment divided by the total principal and interest due on all intermediate and long-term loans.
- Make wise decisions on the use of available cash for farm machinery and capital improvement investments, and make sure that the investments are needed for the farm operation.
- Term loans that are set up to finance machinery purchases and capital improvements may require payments for several years, which need to be factored into cash flow budgets.
- Look for opportunities to sell any farm assets that are no longer needed in the farm business, and use funds for added working capital or to repay some term debt.
- Carefully analyze farm land purchase decisions.
- There is likely to be a lot of farm land for sale in the coming year, so don’t get caught up in the hype of: “Buy now, because they don’t make any more farm land”. Make sure that any land purchases are financially sound for the long-term future of the farm business.
- Shop around before settling on a high dollar purchase of farm land, as there may be opportunities to find comparable farm land, as far as land quality and production capability, for less money.
- Compare the cost of owning the farm land to the likely annual land rental rates to secure increased crop acreage.
- Be sure to include the required annual real estate loan principal and interest payments, along with real estate taxes, into annual cash flow planning for the farm business
- Communicate with family members, farm partners, and ag lenders.
- When financial matters and farm profitability become more challenging in a farm operation, it is very important to discuss these challenges and possible solutions with family members and other partners in the farm operation.
- Meet with your ag lender early to discuss your farm operating credit needs for 2018, and to consider possible solutions to address any financial challenges that may exist.
- Utilize farm business management advisors, crop insurance agents, marketing advisors, crop consultants, and other professionals to assist with farm management decisions.
- Discuss planned machinery and equipment purchases, and potential land purchases, and the projected cash flow impacts on the farm business, prior to finalizing those decisions.
- Discuss grain and livestock marketing plans, and the impact that marketing decisions could have on cash flow plans.
- Discuss any financial concerns early, either farm-related or non-farm concerns, while there is still time to make the needed financial adjustments.
- View your Ag Lender and other professionals as consultants to assist with key financial and management decisions in your farm operation, rather than as adversaries.
Note — For additional information contact Kent Thiesse, Farm Management Analyst and
Vice President, MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960);
E-mail — firstname.lastname@example.org)