As we look ahead to 2015, crop revenues are likely to be significantly reduced compared to revenue levels in recent years. 2015 crop input costs for seed, fertilizer, and chemicals are likely to be similar to 2014 levels, and land rental rates will likely remain fairly high, which adds more risk to 2015 crop production. The profit margins in the livestock sector should remain fairly solid in 2015, due to continued expectations for continued moderate feed costs. 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 payment on term loans.
- Use excess crop revenues from 2014 corn and soybean sales to prepay 2015 or 2016 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 could change significantly in the future.
- 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 farmland.
- 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 farm land.” 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.
- Pay attention to details for the new farm program options, and make decisions that make the most financial sense for the next five years (2014-2015).
- 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.
Communicate with your ag lender.
- Meet with your ag lender early to discuss your farm operating credit needs for 2015.
- 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, including the choices in the new farm program.