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Corn+Soybean Digest

Cash Flow Crunch

The need to borrow money is the reality of doing business in today's new era of farming, says Chris Hurt, Purdue University Extension economist.

“The risks involved in managing this year's crops are the greatest ever,” says Hurt. “Farmers now have to deal with the highest input cost per acre ever and the most total dollars invested in a crop.”

As a result, many farmers could find themselves in a cash flow crunch as they try to lock in prices for their 2009 crop inputs, especially prior to the 2008 harvest. “This will be a year when almost everything else will be at an all-time high — there's no relief to be seen anywhere,” says Steve Becraft, Cargill crop inputs manager, Minnetonka, MN. “An average-scale farmer could need $1 million in financing next year. So, access to capital will be important to a lot of growers to maintain an operating budget and cash flow.”

But, adequate cash flow isn't an issue for Seth Ivey, Oxford, NE, thanks to a Cargill financing package called Full Season Financing. “This program helps me lock in my projected fertilizer and crop inputs at a lower cost (by buying early), and I pay a lower interest rate than I could get from a bank,” he explains. “I also don't have to pay anything until November, when I have more cash coming in again.”

Seed, fertilizer, crop protection products and application costs are all factored into the financing plan, says Ivey, who grows crops on both irrigated and dryland fields in a variety of soil types. “As long as you do a certain amount of business with them in all four areas, you qualify for low-interest financing,” points out Ivey. “Having that deferred payment plan really frees up a lot of cash from about July until harvest that I'd normally be spending on paying interest at the bank.”

Cargill offers four different financing packages, says Becraft. Each has a different start date and payment date. Interest rates will vary, depending on the year and the program.

Financing promotions like this one can be an important tool for risk management, notes Hurt. “Many input suppliers have recently been saying that their price risks are too big, so the producer will have to pay for forward contracting,” he says. “Most bankers aren't huge risk-takers either, and they may heistate to finance margin calls for grain futures contracts or extremely large loans to an individual producer. So, the producers are being hit from both sides, and there is a real need for companies to offer some kind of margin risk protection.”

In 2008, farmers have already seen soybean prices swing through a nearly $6 range and corn swing in a $3 range, points out Hurt. “This market has both enormous profit opportunity and horrible downside risk,” he says. “So, learning to deal with all this risk is something every farmer should try to manage.”

The main question farmers need to answer when thinking about marketing grain and managing risk is how to protect against downside risk without limiting profit potential, says Hurt. To do both, he advises farmers to consider buying crop insurance and using options for grain marketing, although he warns to use options cautiously.

“Diversifying when you're buying inputs and selling grain is one strategy to help mitigate risk,” he adds. “If you get your timing right, you could make as much with this year's crop as you did in the last five years put together,” points out Hurt. “If you get the timing wrong, it could set you back for five years.”

Ivey's decision to work with a grain broker to help make grain-marketing decisions is one that Hurt says could prove very beneficial. “It's time for a lot of farmers to either learn how to improve their marketing skills themselves or use a market advisor,” he says. Some companies provide both marketing and risk-management services, he adds.

“With my cow-calf and grain operations, I don't have a lot of time to micromanage, so Cargill has helped me tremendously on a time-management factor,” says Lloyd Schneider, Logan, KS.

Fullfield planning is a new process that Cargill is featuring this year that will help farmers assess their costs and risks on a field-by-field basis, says Becraft. “The tool will be very helpful to growers to plan both their yield potential and their best crop by profit potential,” he emphasizes. “The FullField plan will show breakeven profitability by both field and crop.”

However, several other companies offer similar marketing and risk-management services, says Hurt. He advises farmers to “look at the different alternatives that are available to help reduce risk and lock in profitable returns.”

One such alternative is Diversified Services, the farm services and risk management division of CGB Enterprises, Inc. “We work with farmers to analyze their risk and to put a plan together to effectively deal with those risks,” says Rodney Clark, general manager, CGB Diversified Services, Inc., Mount Vernon, IN. “We have proprietary software to help do that. One is called Market Alliance and another is called Profit Matrix. Both programs build in where you stand in government programs and crop insurance. Profit Matrix also builds in how hedging costs affect profits.”

Analysts with CGB Diversified Services are both crop-insurance and marketing advisors, says Clark. “Expertise in these two areas really goes hand in hand,” he points out. “It would be difficult in today's economy to do one without the other.”

Since a farmer's overall objective is to make money, some mechanism should be in place to capture higher prices when they occur, says Hurt. Yet, part of the equation to ensure profitability nowadays is to “have a large enough line of credit to be able to handle uncertainties,” he says.

“Farmers should check with all potential financial lenders to help with any cash flow needs that they may have, including making margin calls and locking in input costs,” he says. “At the same time, farmers need to recognize the magnitude of the risks in the marketplace and their personal exposure to those risks.”

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