Historically, there has been an old saying that farmers and ranchers are asset rich and cash flow poor. In other words, they work their whole lives just above or below cash flow breakeven, scraping by, only to see assets – particularly land – appreciate in value which causes them to frequently die as millionaires. Often the key to success was utilizing non-farm income to supplement cash flow while withdrawing a modest family living allocation from the farm.
Those times are changing, particularly over the past nine years, and especially in the grain and row-crop sectors of the agricultural ledger. High demand for food, fiber and fuel, along with a growing ethanol industry, has bolstered record profits and cash flow on many producers’ income statements. Some areas have tapped into oil, gas and mineral resources as a source of cash flow, which has resulted in increases in farmland prices as land investors see future potential.
Numerous dangers lurk in this “new normal” for agriculture, as many experts are calling this current cycle. With record high prices being paid for farmland, assets have doubled in value in some areas the past five years. This can cause a false sense of security because of the large amount of paper equity on the balance sheet. Remember that paper equity does not result in cash until a sale is made.
Record profits on producers’ income statements are resulting in purchases being made based on tax minimization objectives versus sound strategic decision making. Others are withdrawing high amounts from the business for family living and the newest on and off-farm “killer toys” with their newfound income.
Prudent strategies in profit allocation and strategic investments are the mottos for this “new normal.” The cycle can shift at any time, and having your business positioned for a dip in earnings is crucial.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]