I’m getting a bit concerned about my budget this year. My operating note is higher than projected. Is there some type of ratio between the size of the operating note and gross sales or net income that will tell me if I’m in trouble?
The subject of adequate working capital, or ops equity vs. debt needed for a low-risk operating note, is probably still the No. 1 concern of Midwest ag bankers. How much money does the bank put in? How much do you contribute to the total costs of the growing crops?
Bankers may require a percent of borrowed vs. equity funds, but they can be a moving target depending upon yield projections and prices, leading to the big question: Will you make a profit?
The first issue to address on your operating note is if you have accounted for all the old-crop inventory or sales. Has a drop in grain prices shortened your incoming cash flow? Have you paid for any 2019 inputs already, or did you buy any machinery or equipment out of the ops line? Your agronomic, ops and overhead expenses should be fairly close to budget, unless you added acreage or cash rent. Did you carry more ops credit into 2018 than your cash flow projected?
Last year we documented financial institutions loaning from 90% down to 50% of the expenses to put in a crop. If working capital or your balance sheet equity has been eroding for more than one year, or if you are obviously paying too much cash rent for current grain prices, you often had to use secondary point-of-source credit to acquire the funds for your inputs.
Your operating note should therefore not exceed 80% of your gross sales to sustain the 20% op equity cushion.
Despite some potential great yields in 2018, prices have tanked enough that there will be tens of thousands of operating notes that will not zero out once grain is harvested. The main cause for exceedingly high breakevens remain excessive cash rents and a too high cost of living. Excessive overall debt and a lack of liquidity for today’s cost-price relationship will increasingly restrict operating loans.
Accrual-based crop year profitability analysis is so critical right now, because you are at the point where we mix up three different crop cycles, with 2017 crop deliveries, 2018 inputs and prepay on 2019 inputs. Spend the priority of your time stress-testing accrual 2019 and 2018 versus 2017 accrual actual.
If you are going backward, drop the super-high rents, shop at Walmart and buckle down. That’s a safer bet than betting on a market recovery.
Jerry and Jason Moss operate Moss Family Farms Inc. Send questions to: email@example.com