Protecting Cash Flow
If commodity prices were anything to go by, 2016 was not the best year in agriculture’s recent history. Commodity production did go up (some saw record yields) and for some producers that balanced out the low prices. For others, the higher yield was not quite enough to cover production costs at the low prices received. Many analysts are pointing out the cyclical nature of agricultural production and think we are just in a low point of the cycle and farm income will begin increasing again in the next couple of years. Until that happens, though, what do we do in the here and now?
My first suggestion is to sit down with your financial partner (lender), or find one if needed. The job of your financial partner is to help you reach the full potential of your farms and ranches. A successful farmer will translate to success for your financial partner. We want to be the enthusiastic voice of assent when it’s time to expand and diversify, and the calm voice of reason when unforeseen circumstances occur. Having a discussion now with your lender before the production season really kicks off can help the both of you in decision making as the year unfolds.
One thing a producer can do when looking at the next production year is to take an assessment of all expected costs and balance that against a reasonable expected income projection. Reasonable would be based on current and expected prices for the year, and hopefully be enough to cover all expenses and debt payments. Unreasonably high income expectations can lead to further problems down the road, especially if new debt is brought on based on expectations that do not materialize. If additional debt can be paid with current, or even lower, income projections, any additional income is just a bonus. If reasonable projections cannot cover the current expenses and debt, now is the time to have that discussion with your financial partner before it becomes an issue. Communication is key.
Another tool producers have in their pocket is locking in their expenses and income. Pre-paid expenses are becoming a more common occurrence, especially as input costs seem to rise accordingly with income, but do not necessarily appear to fall as quickly when income is reduced. The futures market, call and put options, and video marketing are some of the more common options a producer can use to protect the price received for this year’s crop or calves, and can be used to control to some degree the profit margin of the operation. Crop and livestock insurance can protect a producer from severe loss due to uncontrollable instances such as weather or accidents.
As farmer and ranchers, the majority of our income is dependent on factors outside our control (i.e. weather). Using the different options and protection choices available to us makes sense in bringing a sense of stability to our livelihoods that others in “town jobs” do not have to worry about. Discuss your options and your operation’s goals with your financial partner. Utilizing a professional’s financial advice just as you would a veterinarian’s in your operation is common sense, and building a working relationship with that partner can be key in the success of your operation and the achievement of the goals you have set.