4 Farm Finance Strategies

A quick look at three scenarios reveals how this sample cash crop farm will have a large negative cash flow, says Kelvin Leibold, Iowa State University. “At year’s end, it will have a lower current ratio, less working capital, and struggling net income,” he says. New machinery was purchased in 2013. “If you buy machinery with cash, you eat up working capital, and this can put your business at more risk,” he says. “Buying machinery utilizing credit will impact future cash flows and working capital.” In 2014, this producer had 38% of dollars (working capital) needed; by 2015, it had dropped to 24%. The current ratio slipped from 2.2 to 1.6. Replacing corn with soybeans would improve net cash flow by $23,000 – a bigger help than dropping 200 acres of high cash rent ground. Stretching debt out would help net cash flow, shore up the current ratio, and improve the working capital-to-gross revenues ratio. “We need to know the family living costs and how government payments are included,” Leibold says. “This producer is living off of working capital.” He advises producers to understand their financials before meeting with a lender. “It’s a challenge to explain how you can have declining net worth and still be profitable,” he says. “You can be profitable with negative cash flow if you’ve spent it on bins and equipment. Or you could lose money feeding cattle and have positive cash flow if you keep borrowing. Be ready to explain the change in your numbers. Was it a divorce? Or was it a new grain dryer to improve efficiency?" 1) Focus on breakevens and marketingAndy and I are reviewing our balance sheet, breakevens, and cash flow more frequently. Understanding our overall financial picture makes it easier to make sales when opportunities present themselves. Our overall financial picture helps determine where we need to make sales in our marketing plan. However, the markets may not give us all we need or want. So we sometimes make sales if we’re getting to a point in the year when we need to execute more sales. Then, we’ll look at whether to reown at a later date. We mostly utilize a hedge account to sell futures and make cash sales based upon when basis is strong.– LaVell Winsor, Kansas 2) Position for the long haulProducers who are burning working capital may need to explore several scenarios, including an overhaul of their financial engines. Example: A farmer has about 1,200 acres of corn and soybeans with 225 acres owned. The average per-acre cash rent is $250. New machinery was purchased in 2013 to save taxes. Three scenarios are planting less corn and more soybeans; dropping cash rented acres; and debt restructuring. “Many farmers won’t part with money-losing land,” Swanson says. “Farm the best, leave the rest.” “It’s a tough decision,” counters Dale Nordquist, Center for Farm Financial Mangtement, University of Minnesota. “The returns from most rented land cover direct costs and some of the overhead. Most farmers have geared their operation to their land base. Can they make other adjustments? The question is long term." He adds, “Debt restructuring is a last resort. My concern about preemptive debt restructuring is that short-term debt may build back up again.” 3) Examine your ROIWe have stopped making any capital purchases that don’t result in a high return on investment. Our equipment dealer came up with some pretty good offers, but with $3 corn and $9 beans, we’ll get by using our equipment for a few years. We upgraded our tractors and combine in 2009 and 2011. We’ve experimented with vertical tillage, but some of our soil types benefit from chisel plowing. This year we no-tilled into the cornstalks where we had used vertical tillage. We had one pass in the fall, put on the burndown, and then planted. It reduced expenses, was more timely, and preserved soil. We’ll see what happens with our yields. – Ron Moore, Illinois 4) Do it yourselfWe have always hired a custom crew to apply the manure from the barns, but it was a struggle to get them there on time and have them do the job the way we would ourselves. Recently, we bought a 9,500-gallon tanker, two transport tanks, agitators, and transfer pump. Now we’re able to pump our barns in a timely manner, and we save a lot of cost. We pump a neighbor’s barn, too, so it was an opportunity for more business. The savings will cover our investment in a little over two years, not counting any custom work. Knowing that we’ll get the manure pumped before the ground freezes has a huge value to us. We also plan to start selling bred heifers every year. It’s always been our plan, but we’re finally up to our target herd size. We have AI’ed about 300 heifers, and we’ll market them in December. Our commercial herd is built on good genetics from leading Angus and Red Angus breeders. Getting that value out of the bred female vs. a backgrounded yearling should improve our net gain.– Drew Peterson, South Dakota