Editor's notes: Each month in Wallaces Farmer magazine, the Timely Tips panel answers questions sent by readers. Members of the Timely Tips panel are: William Edwards and Michael Duffy, Extension economists, Iowa State University; Leslie Miller, Iowa State Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa. Following are two questions sent to us this month and the answers from our panel.

While doing my financial analysis in February, I looked at my farm’s profit prospects for 2017. My financial ratios did not look good to me when I renewed my credit line to get ready for planting this spring. They looked better on my lender’s balance sheet, which he prepared. Now I see my lender listed machinery that I’m leasing as “owned.” That inflated my working asset value by about $600,000. Remove the “owned” machinery and my ratios look worse. My 2017 crop income prospects are not so good, either. What should I tell my lender?

Edwards: First, correct the lender’s records as soon as possible. Even if the lender made out the balance sheet, you probably signed it at the bottom and attested to its accuracy. Only owned machinery that appears on your income tax depreciation schedule should be listed as an asset, and that would usually not include leased items unless it is a “capital” lease, which is actually an installment sales contract. By the same token, make sure there are no liabilities associated with the leased equipment on your balance sheet. Lease payments are not considered a liability unless they are past due. It is quite likely you are not their only customer with less-than-stellar financial ratios and profit prospects this year. It would be helpful to complete a formal quarterly or bimonthly cash-flow budget for 2017, so you have a financial plan to follow this year, and so neither you nor your lender have any surprises later.

Stout: You need to come clean and point out your lender’s discrepancy. I hope your lender would appreciate your honesty in this matter. It might mean restructuring some of your debt to improve working capital, but it should improve your relationship with your lender. It would be good to have a discussion with your lender about whether leasing is the best option for your farming business.

Miller: Did your lender show the lease payments plus the buyout option as a debt when the leased equipment was shown as an asset? If so, then you are probably OK. If not, then you should ask your lender to correct the statement. If the statement is not corrected this year, and correct information is used next year, it might appear you have lost net worth when, in fact, you did not. Some institutions will place borrowers who lose net worth on a watch list and even charge them higher interest rates. You don’t want that to happen to you, so you should try to work with your lender to get the most accurate statement possible each year.

Carrying over old-crop corn for feed
Every year, Dad carries over enough old-crop corn to run our modest hog operation for two months. Most years I watch the corn price skid and the basis widen as old crop becomes new crop. I claim we’re leaving a lot of money on the table by not emptying our bins on the old-crop market. Dad says, “Guaranteed supply has tremendous value. I slept good in 2012, while many livestock-producing neighbors did not.” Is he right? How much is that guaranteed supply worth? How do I figure whether we capture enough value in short crop years to more than offset what we give up in normal big crop years?

Duffy: There are two issues to your question: What is the value of reduced risk and peace of mind? What are the expected returns from changing marketing strategies?  How much a guaranteed supply is worth depends on your perspective.  Your father values “sleeping good” and is willing to give up some income for that. You are younger and value the money on the table more than the sleep. You could calculate expected values to estimate the value of different strategies, but that is an exercise beyond the scope of this answer.

The Iowa State University Ag Decision Maker website presents data that shows the average corn price increases over the two-week periods from January through March for the years 2006 to 2015. The increase is modest, 1%, but the years of increase are more than decreases. The Ag Decision Maker website also has data that shows, on average, the corn basis narrows after Dec. 1. There are different philosophies with respect to whether or not to sell or keep new-crop corn. Your crop and the market should determine your yearly approach, not a rigid philosophy. You need to remember you and your Dad will have different points of view from your farming and life experiences.

Stout: In the past 20 years, have you always raised enough corn to supply corn needs for your hog operation? If so, then you certainly don’t need to carry over two months of corn for feeding. I suggest just carrying over enough corn to get into harvest far enough that you can get a bin dried and cooled so you can grind out of it. In a typical year, the price drops and basis widens during harvest. I would sell during expected spring and summer rallies all of the corn you don’t need for summer feeding, with an additional two to three weeks of corn to get you into harvest to get corn ready to grind, as mentioned before.

Miller: To protect a price without giving up physical control of the grain, you will probably need to use the futures market and/or puts and calls. Are you prepared to do that and manage the change in basis, as well? If not, you might still be able to negate a little of the price decline just by locking in a basis contract on October and November sales.

A basis contract won’t protect you against Board futures market prices falling at harvesttime, but it will help you avoid the double penalty of increasing basis and falling prices. The only drawbacks are: 1) you have to lock basis in early — most probably in March, April or May; and 2) you will eventually have to deliver grain, which takes away your feed inventory cushion.