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How to deal with lower farm incomes: Cutting costs

How to deal with lower farm incomes: Cutting costs

Net farm incomes in 2015 are projected much lower than in recent years. These low net incomes will lead to cash shortfalls. One way to deal with this cash shortfall is to use working capital to meet cash shortfalls resulting in reductions in cash and other current assets. Many farms should expect a significant decrease in working capital and the current ratio by the end of 2015.

On many farms, 2015 cash shortfalls will result in current ratios near or below the 1.76 average from 1996 to 2005. In essence, the 2015 cash deficit will bring these farms back to a current position similar to that prior to the 2006 increase in commodity prices. Farms in this position are more likely to have a higher proportion of their farmland cash rented at above-average cash rents or began their operations relatively recently. These farmers will not have a choice. They will need to reduce cash flows related to 2016 production.

Other farms will have a current position cushion even after meeting likely 2015 cash shortfalls. These farms will have alternatives. They could postpone reducing cash flows till later, potentially hoping that commodity prices increase into 2016. At this point, current futures prices do not point to increasing commodity prices in 2016, leading to projections of 2016 returns being near the low levels projected for 2015.

The decision then is to cut costs. As most 2015 production costs have been incurred, decisions will revolve around 2016 production inputs and cash rents. Candidates for cutting include:

  1. Reducing machinery purchases, something that most farms have already done.
  2. Reducing 2016 seed, fertilizer, and chemical costs.
  3. Reducing 2016 cash rents.
  4. Reducing family living withdrawals.

Read more about this from the University of Illinois.

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