Although newly available farmland and heavy discounts on equipment might be attractive, experienced farmers and business experts alike recommend you hang onto cash instead of letting it burn a hole in your pocket.
One of the best ways to preserve working capital this harvest and beyond will be to revisit loans, producer R.D. Wolheter says.
“We keep as much debt as possible on land—in other words, long-term financing,” explains Wolheter, who farms about 3,000 acres of corn, soybeans and wheat in Wolcotville, Ind. “We’ve refinanced to lock in some pretty good interest rates.”
For his operation, the process of restructuring started in 2013 and continued this year. Wolheter also has taken advantage of locking in a little machinery debt at a “fairly low rate” and is getting a lower interest rate on a bin he is building through USDA–Farm Service Agency.
“A lot of people feel there is more of a hassle and more paperwork to go through, and there is,” Wolheter says.
“But you just learn how to do things, work with them and do what needs to be done.”
The decisions Wolheter is making should be on the minds of producers across the Corn Belt, not only this harvest but for the next three to four years, says Mike Boehlje, ag economist at Purdue University.
“Our numbers suggest we’re still going to be in a loss position for the 2015/16 crop,” Boehlje says. “We don’t expect to get back closer to a breakeven position until maybe 2017/18. That means farmers are going to have to be much more cash conscious than they have been.”
Maintaining enough working capital to manage through difficult years is good risk management.
“In order to ensure two to three years’ worth of capital is retained in practice, producers should be transparent and communicative with their operating lender,” says John Zawistowksi, investment analyst at Prudential Agricultural Investments in Lisle, Ill. “This will help to secure a commitment from their lender year over year.”
This harvest protect against downside risk with the option of capturing prices if they recover.
Where To Start. Next, turn your attention to existing expenses. Be aware you may be required to pay taxes on income generated between 2012 and 2015 that has been deferred through the use of Schedule F deductions.
To cut expenses, avoid buying farmland or machinery unless it fits your business plan.
Looking ahead, it might also be prudent to meet with your lenders now to extend loan periods beyond the typical 10-year repayment period for land and three- to five-year period for equipment, Boehlje says. Have a packet of paperwork prepared for your advisory team in the run-up to the loan review period that typically begins in December and runs through February.
Leave No Price Stone Unturned
Although the marketplace might look bleak to producers of all generations, it can seem especially worrisome to young farmers. There are reasons to remain cautious, but don’t lose sight of the future, says Mike Boehlje, ag economist, Purdue University.
“We think the outlook for the agricultural sector is pretty positive generally for the long run, but we’re at a bump in the road,” Boehlje says. “We want to make sure we don’t find ourselves behind the eight ball.”
That means no expense is too small to go unchecked, including family living costs such as new pickups and home additions.
“This is probably one of those times when some of these big-ticket personal expenses may need to be put on hold so that we don’t undercut the financial resiliency of the business, the cushion that we need to handle this downturn,” he explains.
Create a sheet that specifies the maximum price or price range in which you will purchase fertilizer, chemicals and traited seed to make decision-making more efficient and systematic.
“Make sure you have the best price you can find compared to competitors,” Boehlje says.
By Nate Birt, Top Producer Managing Editor
Source: AgWeb.Com