As we look ahead to 2011, crop revenues are likely to remain strong; however, rapidly rising crop input and land costs could reduce profit potential and add more risk to 2011 crop production. The profit margins in the livestock sector are also likely to remain very tight during the next 12 months. The short-term operating credit needs for agriculture are likely to increase in the coming year, given the increases in farm input expenses and land rental rates for 2011. Credit availability for agriculture should remain good for farm businesses that are on a solid financial base. However, credit could get tighter for farm businesses in a higher-risk financial position, especially livestock producers who have not fully recovered from the significant financial losses incurred in 2008 and 2009.
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.
- It may be better 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.
- Use excess crop revenues from 2010 grain sales to prepay 2011 or 2012 crop expenses.
- 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 concerns.
- Be wary of excessive spending for family living and non-farm expenditures.
Be cautious of machinery and facility investments for the farm business.
- Make wise decisions on the use of available cash for these investments.
- Make sure that the investments are needed and have a potential return to the business.
- Only purchase upgraded farm machinery to avoid paying added income tax when that investment is needed. Be sure it makes sense for your farm business.
- Remember that the term loans set up to finance these investments will require payments for several years, and need to be factored into future cash flow budgets.
Be cautious of buying expensive farmland.
- There is likely to be a lot of farmland for sale in the coming months. Don’t get caught up in the hype of: “Buy now, because they don’t make any more farmland.” Make sure that any land purchases are financially sound for your farm business.
- Shop around before settling on a farm purchase, as you may be able to find a comparable farm, as far as land quality and production capability, for less money.
- Compare the cost of owning the land to the likely annual land rental rates.
- Be cautious of excessive use of available cash for land investments.
Look at ways to control expenses and reduce financial risk.
- Fine-tune your grain-marketing plan, based on your cost of production.
- Take time to analyze the best crop insurance strategies for your farm operation.
- Take advantage of pre-payment discounts for seed, fertilizer, fuel, etc.
- Be cautious of excessive bidding for land rent, and consider flexible lease contracts to address volatile crop prices and profitability, provided the landlord will agree.
- Livestock producers need to look at opportunities to lock in feed expenses and other input costs, in addition to locking in profitable market prices.
- Avoid risky non-production investments, even if they are agriculture related.
Communicate with your ag lender.
- Meet with your ag lender early to discuss your 2011 farm operating credit needs.
- Discuss planned machinery and equipment purchases – and potential land purchases – and the projected cash flow impacts on the farm business.
- Discuss your grain and livestock marketing plans, and how they fit into cash flow plans.
- Discuss any financial concerns early, either farm-related or non-farm, while there is still time to make adjustments.