It’s frustrating; it’s time to begin securing crop inputs for next year’s crop and you likely haven’t finished this year’s harvest. And, despite lower grain prices, crop input costs remain high. Something’s got to give, but until it does farmers have to manage through it.
I recently brainstormed with a group of farming peers to identify strategies farmers could use to improve cash flow or generate short-term liquidity. This list is by no means a ‘be-all and end-all’ – but could provoke a path forward in your situation.
Managing costs
Land costs. One of the top costs for farmers is the cost of land. I shared some tips for how to approach land rent negotiations in my last post.
One of my farming friends is approaching his landlords with a universal proposal to reduce rents by 15% in 2025. This includes an option held in his back pocket to restructure his fixed cash leases to a variable flex lease, if needed.
Given the higher interest rate environment, we looked at alternative financing options such as some newer equity financing models offered by companies like Fractal Ag. It took us a while to wrap our heads around the concept, as it’s not like traditional financing. It feels more like bringing in a capital partner to own a fractional interest in your land to free up equity while the farmer still retains control.
Equipment costs. In some cases, the cost of machinery is the top line-item cost in farmers’ budgets. It might be time to review your inventory list and consider liquidating the “nice-to-have” or unneeded assets.
Generally, I’ve been more of a proponent of owning machinery versus leasing. However, we’re at a unique turning point in the machinery industry where what you buy today is worth less tomorrow. I’m having more conversations with farmers who are considering freeing up some of the equity in equipment by leasing certain higher-use machines instead.
Worth noting: Instead of leasing equipment from a large equipment manufacturer, farmers can also play the lessor by leasing back equipment they’ve sold to someone else. One family I work with has a separate leasing company to allow other family members to purchase equipment and deduct the cost for tax purposes.
Crop inputs. Many of the crop input suppliers offer their own financing terms with options for zero percent financing.
We also found newer companies who have entered the marketplace, who are attempting to give farmers more direct access to their products and cut out the middlemen. They, too, offer attractive financing terms compared to traditional alternatives.
Grain strategies. None of us, self-admittedly, did a great job forward marketing our grain this year.
Those who have on-farm storage could consider sealing a portion of their grain with a USDA loan. This will provide immediate cash flow while allowing participants to wait for more favorable market conditions to sell stored grain.
Downsize/restructure. This goes against the grain for most farmers, but some of the most successful farm operations we’ve worked with have downsized or restructured at some point in their farming career.
We also found newer companies who have entered the marketplace, who are attempting to give farmers more direct access to their products and cut out the middlemen. They, too, offer attractive financing terms compared to traditional alternatives.
If we need cash, we could consider selling it and buying back a portion of it with a call option, which is a relatively low-risk strategy.
Those who have on-farm storage could consider sealing a portion of their grain with a USDA loan. This will provide immediate cash flow while allowing participants to wait for more favorable market conditions to sell stored grain.
This could include walking away from high-rent farms or other lower-profit enterprises on the farm. One farmer I’m working with is rewarding the strength in the cattle market by culling some of his herd.
Consider selling land
The other alternative no one wants to think about is selling land. However, here are two strategies to consider if it becomes a need:
Sale lease-back. Farmers can sell their land to an investor or ‘capital partner’ and lease it back, maintaining operational control while accessing capital.
These transactions can be structured with an option to buy back the tract of land when and if offered for sale in the future.
Beginning farmer loan. This is a strategy we’ve used in family farm transitions to leverage the benefits of low-interest funds from the USDA. In this case, a tract of family land is sold to someone in the next generation. If structured well, a part sale-part gift is a win-win for all parties of the transaction.
I realize all of these ideas are described at a high level, so please send me an email if you would like more information on any of them.
Downey has been consulting with farmers, landowners and their advisors for nearly 25 years. He is a farm business coach and transition consultant with UnCommon Farms. Reach Mike at [email protected].
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