With a lot of positive momentum heading into the year and continued signs that’s likely to be the case for a while, the first few months of 2021 offer farmers opportunities to check some items off their operations’ financial to-do lists. Just stay on top of your farm’s production costs and don’t get lulled into the financial complacency that is common when grain prices turn higher, advises a Conterra Ag Capital ag finance expert. Here are a few tips for how to navigate what many expect to be a generally bullish year for the grain marketplace.
Actively market crops to secure profits
When prices offer more revenue potential is the ideal time to be proactive with cost management, from the smallest variable costs to the largest fixed costs. That starts by actively marketing your crops — both old-crop in the bin right now and projected new-crop 2021 output. Whether you’re accustomed to selling on the cash or futures market, don’t veer far from your marketing strategy just because prices have more to offer your bottom line and don’t hold back on making sales based on a generations-old excuse.
“You’ve been waiting for these prices, and they look pretty nice right now. Don’t stop short of selling right now just because you think the top isn’t in yet,” according to Wamego, Kansas-based Conterra Ag Capital Relationship Manager Luke Schultz. “If the market is working well for you right now, you should be selling some old-crop. Sell the physical grain you have now, and if you think there’s going to be a bigger run later, you can sell next year’s crop on the board. There are plenty of ways to protect yourself.”
Hire a professional
That sort of incremental sales approach is one that many grain market analysts and brokers recommend to their customers. Especially in a time when revenue potential is high, selling incrementally on either the cash or futures market is a good idea, and it’s one of many grain marketing strategies that can and should be employed with the help of a professional.
“You might be the best farmer in the world, the best mechanic in the world, but if you can’t prove to me that you’re the best marketer in the world, it’s something you need to hire to have done for you. That way, busy times like calving and planting don’t get in your way,” Schultz said. “These opportunities are too good to pass up.”
Keep an eye on your bottom line, especially with livestock
Though it can be difficult to pull the trigger on grain sales when the markets are rising, Schultz advises approaching such marketing decisions with an eye on your bottom line. That way you’re basing decisions on what you need, not what you think you could get by delaying marketing decisions. The same is true in other markets that aren’t as surrounded by optimism, namely in the livestock business.
The cattle sector is one that will likely see tight margins in 2021 based on feed costs, namely corn. Similar to grain farmers taking advantage of bullish prices to cover costs, cattle producers should be looking for ways to cover feed costs to prevent too much revenue attrition.
“Obviously you have to look at your bottom line and see how you can cheapen up your feed rations, maybe finding a cheaper feed source. Look at other sources like corn stalks, for example,” Schultz said. “Cost of gain will just be outlandish and there will be a period of losses within the fed and feeder cattle sectors in 2021 until the market balances out. Generally speaking, high cattle prices will follow high corn prices, but it just takes some time to happen.”
Spend wisely with improved crop revenue
In addition to making sure you’re adequately covering your operating costs moving into 2021, Schultz advises prudence in adding things like new equipment and machinery, again keeping your eye on your bottom line.
“Direct payments in 2020 bumped liquidity into a lot of farmers’ balance sheets. They weren’t taking the money and buying iron. They were paying down debt,” he said. “For me personally, I’m not a huge ‘new paint’ guy. I’ve seen the most successful operators learn how to use late-model equipment. They know that a five-year-old machine will do the same job as something brand new. If you can lower debt, it’s always going to be for you. Can you afford a major breakdown at harvest if it’s worn out? Absolutely not. But ask yourself if you need or just want that new machine.”
In the short term, Schultz said crop producers should apply their bottom line-first view to securing crop inputs early to capitalize on retailer discounts and otherwise capitalize on prices that are likely to increase as long as grain prices remain strong.
“You need to be looking at those inputs now if you haven’t already. You have to know your cost of production,” he said. “Look at your production costs and what you can get locked in, especially if you’re penciling out a profit right now.”
If you’d like a hand with managing your farm’s finances, our ag lending team at Conterra would love to chat. Get in touch today.