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Farm working capital: Use it or save it?

Farm working capital: Use it or save it?

Because of strong corn and soybean prices, many farms have significant reserves of working capital that were built from 2006 to 2012. Lower commodity prices are now projected for the foreseeable future. Those price levels coupled with high costs lead to projections of low or negative cash flows for the next several years. These low return levels will cause negative cash flows on many farms. Farmers then may choose to use working capital in meeting these cash shortfalls, leading to reductions in working capital. Some things to consider about the use of working capital include:

  • Many farms will be able to withstand low and negative cash flows by using working capital and other financial resources built in the past several years.
  • Some farmers do not have as much working capital as indicated by the above averages. The below figures show average levels of many farms. There are some farms that have smaller reserves. Farms with smaller reserves tend to be operated by younger farmers beginning in farming. Also, those farmers who pursued aggressive growth strategies in the past several years using high cash rents to acquire control of farmland may have low levels of working capital.
working capital per acre
Increasing levels of working capital per acre indicate that many farms built financial reserves. However, the total reserve is not likely to be equal to the current level minus the $179 average from 1996 to 2006. More working capital is needed now because of higher costs. Since costs have roughly doubled, working capital in the $350 to $400 per acre range now would be equivalent to the $179 per acre level from 1996 to 2006.

  • For farms with significant amounts of working capital, "easy" decisions will be to continue operations without reducing cash flow. At this point, projections suggest low to negative cash flows for 2015 and the next several years. If commodity prices do not increase, costs and other cash flows will need to be reduced at some point. Reduced cash flows will come from 1) reductions in seed, fertilizer, and chemical costs, 2) reductions in cash rents, 3) reductions in machinery purchases, and 4) reductions in withdrawals from farming operations for family living.
  • Preserving working capital now may be a prudent strategy. As working capital is reduced, a farm's abilities to meet potential future financial difficulties also are reduced. Where this tradeoff likely will be faced most directly is when making cash rent decisions for 2016. Some farms may have farms with high cash rents, leading to projections of negative returns in 2016 if cash rents are not reduced. If landowners are not willing to lower cash rents, some farmers may be in the position where renting the farm is projected to be a financial drain in 2016, leading to an erosion of working capital. Not renting that farm may be the best decision based solely on 2016 returns. However, all possibility of gaining positive returns after 2016 most likely will be foregone if the farm is not rented in 2016. These rental decisions will be very difficult.

Read more about using or preserving working capital from University of Illinois.

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TAGS: Soybeans Corn
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