As we look ahead to 2009, crop revenues are likely to remain strong; however, rapidly rising crop input and land costs will reduce profit potential, and add more risk to 2009 crop production. The livestock sector is also likely to remain highly volatile, with varying profit potential during the next twelve months. The short-term operating credit needs for agriculture are likely to increase in the coming year, and the cost of credit may increase slightly. Credit availability for agriculture should remain good for farm businesses that are on a solid financial base. However, credit could get tighter if the overall U.S. and World financial situation continues to worsen, especially for farm businesses in a “higher-risk” financial position.
Following are some financial strategies for farm businesses to consider during these highly volatile and stressful financial times :
- 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 make extra payments on term loans.
- Use excess crop revenues from 2008 grain sales to prepay 2009 crop expenses.
- Pay attention to the level of “Working Capital” and the “Current Ratio” on your Farm Financial Statement. If there’s a big decline, it could signal some concerns.
- Be cautious of machinery and facility investments for the farm business.
- Be cautious of the use of available cash for these investments.
- Make sure that the investments have a potential financial return to the business.
- It may not be wise to purchase upgraded farm machinery, just to avoid paying added income tax.
- Remember, term loans set up to finance these investments will 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 farm land 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. 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 land rental rates.
- Be cautious using available cash for land investments.
- Look at ways to control expenses and reduce financial risk.
- “Fine-tune” your grain marketing plan, based on your “cost of production.”
- 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 (if landlord will agree).
- Livestock producers need to look at opportunities to “lock-in” feed expenses and other input costs, in addition to “locking-in” profitable market prices.
- Avoid risky non-production investments, even if they are ag related.
- Communicate with your ag lender.
- Meet with your ag lender early to discuss your farm operating credit needs for 2009.
- 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.
- Discuss any financial concerns early, either farm-related or non-farm, while there is still time to make adjustments.
U OF M WINTER CROPS DAYS
The U of M Southern Research and Outreach Center (SROC) is planning a series of Winter Crops Days, presented at five locations in three days in January. The Crops Day program will feature the latest crops and soils research and management information, presented by U of M Specialists. The program will be similar, and will run from 8:30 a.m. to 3:00 p.m., at all locations. There is a $30/person registration fee, which includes program materials and a noon lunch. No advance registration is required. Dates and locations are: Wednesday, Jan. 14 at the U of M SROC Conference Room in Waseca, and at the American Legion in Lake Crystal; Thursday Jan. 15 at Diggers Restaurant in Kasson, and at the Community Center in Wykoff; and on Friday, Jan. 16 at the Community Center in Arlington. For more information contact the U of M SROC at 507-837-5612.