Projected profit margins for crop production in 2020 are likely to be at or below break-even levels for many producers.
Costs for some crop inputs, such as fertilizer and fuel, have increased slightly in the past couple of years, while crop revenues for many producers have declined or stayed steady. It appears that low commodity prices and lower gross revenue levels in corn and soybean production will likely continue for this year. The profit margins in the livestock sector improved somewhat in late in 2019, but were quite variable, which is a trend that is also likely to continue.
Credit availability for agriculture should remain good for farm businesses that are on a solid financial footing; however, credit could get much tighter for those that are in a higher-risk financial position.
Here are some financial strategies for farm businesses to consider:
● Keep the "current position” (cash available) segment of the farm business strong.
● Pay attention to the level of “working capital” and the “current ratio” on your farm financial statement. If there is a big decline, it could signal some financial concerns for the business.
● It is usually a better option to use excess cash revenues from the farm operation to pay down short-term farm operating debt, rather than to make extra payment on term loans.
● If there are any excess crop revenues from 2019 grain sales beyond repayment of the 2019 farm operating Loan, it is probably best to prepay some 2020 crop expenses.
● Remember to account for CCC grain loans, financing with crop input suppliers, short-term loans from family members, etc. when analyzing the working capital for the farm operation.
● Look at ways to reduce production costs and other expenses.
● Try to be a “optimum-cost” producer. Thoroughly analyze seed, fertilizer, chemical, etc. crop expense decisions for this year, and look for ways to manage those input costs.
● Be cautious when making reductions in crop production costs, so not to significantly impact yield potential. Optimizing crop yields is still important to the bottom line.
● Carefully analyze more expensive cash rental rates. If the rates are not profitable, try to negotiate lower ones or possibly give up some high-rent land.
● Negotiate “flexible lease” contracts with agreeable landlords that sets a manageable base rental rate, with the opportunity for a higher final rental rate, if final crop prices and/or yields increase.
● Review all other direct and overhead expenses in the farm operation, and look for any ways to make reductions.
● Review other ways to manage financial risk.
● Fine tune the farm’s grain marketing plan, based on the cost of production, which is updated regularly, and have set price targets and deadline dates as part of the marketing plan.
● Don’t get caught up in the market hype or chatter. Pay attention to how changes in the corn and soybean market prices affect your own farm business.
● Look for “profit margin” opportunities in crop and livestock production and take advantage to lock-in both cash expenses and market prices when those margins exist.
● Take time to analyze the best farm program options and crop insurance strategies for your farm. Cutting crop insurance coverage may not be the best risk management strategy.
● Excessive spending for family living and non-farm expenditures can be a hidden expense in the farm business. Include the non-farm income and expenses, and other family living expenditures, in farm cash flow planning.
● Pay attention to the repayment ability on term debt loans.
● In addition to declining working capital, a low term debt coverage ratio is a common sign of financial stress. This ratio is the cash available for debt repayment divided by the total principal and interest due on all intermediate and long-term loans.
● Make wise decisions on the use of available cash for farm machinery and capital improvement investments, and make sure that the investments are needed, not merely wanted.
● Term loans that are set up to finance machinery purchases and capital improvements may require payments for several years, which need to be factored into cash flow budgets.
● Look for opportunities to sell any assets that are no longer needed in the business, and use funds for added working capital or to repay some term debt.
● Carefully analyze farmland purchase decisions.
● Make sure that any land purchases are financially sound for the long-term future of the business.
● Shop around before settling on a high-dollar purchase of farmland, as there may be opportunities to find comparable land, as far as quality and production capability, for less money.
● Compare the cost of owning the land to the likely annual rental rates to secure increased crop acreage.
● Be sure to include the required annual real estate loan principal and interest payments, along with real estate taxes, into annual cash flow planning for the farm business
● Communicate with family members, farm partners, and ag lenders. When financial matters and farm profitability become more challenging in a farm operation, it is very important to discuss these challenges and possible solutions with family members and other partners in the farm operation.
Meet with your ag lender early to discuss your farm operating credit needs for 2020, and to consider possible solutions to address any financial challenges that may exist.
Utilize farm business management advisors, crop insurance agents, marketing advisors, crop consultants, and other professionals to assist with farm management decisions.
Discuss planned machinery and equipment purchases, and potential land purchases, and the projected cash flow impacts on the farm business, prior to finalizing those decisions.
Discuss grain and livestock marketing plans, and the impact that marketing decisions could have on cash flow plans.
Discuss any financial concerns early, either farm-related or non-farm concerns, while there is still time to make the needed financial adjustments.
View your ag lender and other professionals as consultants to assist with key financial and management decisions in your farm operation, rather than as adversaries.
Kent Thiesse is a farm management analyst and senior vice president at MinnStar Bank in Lake Crystal, Minn.