As we look ahead to 2014, crop revenues are likely to be significantly reduced compared to 2013 revenue levels. There is likely to be some moderation in 2014 crop input costs, due to lower fertilizer costs; however, land rental rates will likely remain fairly high, which could add more risk to 2014 crop production. The profit margins in the livestock sector look improved for 2014, due to the moderation in feed costs that is expected. Credit availability for agriculture should remain good for farm businesses that are on a solid financial base; however, credit could get tighter for farm businesses that are in a “higher-risk” financial position. Following are some financial strategies for farm businesses to consider during these highly volatile and potential stressful financial times in the farming business.
Keep the current position (cash available) segment of the farm business strong.
- It may be better to use excess cash revenues from the farm operation to pay down short-term farm operating debt, rather than to make extra payments on term loans.
- Use excess crop revenues from 2013 grain sales to prepay 2014 or 2015 crop expenses.
- 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 concerns.
- Be wary of excessive spending for family living and non-farm expenditures.
Be cautious of machinery and facility investments for the farm business.
- Make wise decisions on the use of available cash for capital improvement investments.
- Make sure that the investments are needed, and have a potential return to the business.
- Be aware that depreciation deductions for farm machinery investments are likely to change significantly for the 2014 tax year.
- Remember: the term loans set up to finance capital improvements may require payments for several years, and need to be factored into future cash flow budgets.
Be cautious of buying expensive farm land.
- There is likely to be a lot of farmland for sale in the coming months. Don’t get caught up in the hype of: “Buy now, because they don’t make any more farmland.” Make sure that any land purchases are financially sound for you farm business.
- Shop around before settling on a farm purchase, as you may be able to find a comparable farm, as far as land quality and production capability, for less money.
- Compare the cost of owning the land to the likely annual land rental rates to secure land.
- Be cautious of excessive use of available cash for land investments.
Look at ways to reduce and manage financial risk.
- Fine-tune your grain marketing plan based on your cost of production.
- Take time to analyze the best crop insurance strategies for your farm operation.
- Take advantage of pre-payment discounts for seed, fertilizer, fuel, etc.
- Be cautious of excessive bidding for land rent, and consider flexible lease contracts to address volatile crop prices and profitability, provided the landlord will agree.
- Look for profit margin opportunities in crop and livestock production, and take advantage to lock-in cash expenses and market prices when those margins exist.
- Avoid risky non-production investments for the farm or family, even if they are agriculture related or appear to be a good deal.
Communicate with your ag lender.
- Meet with your ag lender early to discuss your farm operating credit needs for 2014.
- Discuss planned machinery and equipment purchases, and potential land purchases, and the projected cash flow impacts on the farm business.
- Discuss your grain and livestock marketing plans, and how they fit into cash flow plans.
- Discuss any financial concerns early, either farm-related or non-farm, while there is still time to make adjustments.
- View your ag lender as a financial consultant to assist you with your farm management decisions.