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Corn+Soybean Digest

Prepayment 2009

A visit to the local cooperative the other day to pick up feed resulted in the usual sticker shock. The manager, who is doing excellent work, pulled me aside to give me a head’s up concerning next year’s fertilizer program on our farms. He indicated that we may need to consider applying potash and phosphorous this fall and winter to ensure availability and price expectations. Many of you are wrestling with the same issues along with prepayment of next year’s inputs.

The following are some factors you may take into consideration before writing the check or making the commitment. Any prepayment options require one to conduct due diligence on the agribusiness firm or supplier. These businesses are facing the same struggles as farms and ranches with cash flows and margins. While at a banker’s conference recently, some stated that producers have lost up $500,000 in money that was pledged as prepayment when the supplier headed south financially. Networking with your agrilender and key financial alliances is a necessary strategy to protect your investment.

Also, study the tax implications of prepayment or doubling the expense of inputs for a given year. While advantageous in the short run, prepayment could create a deferred tax liability in future years. It appears that regardless of this fall’s election outcome, farms and ranches are coming into a period of higher taxation.

Finally, examine your cash flows and operating margins. Conducting analysis on various revenue and cost scenarios to determine break evens and profit margins is a requirement in this environment.

Editor’s note: Dave Kohl, The Corn And Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]

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