With the 2021 season coming to an end, farming operations across the U.S. are harvesting. Now is also the time to prepare for next year. Outside of the all the necessary field work, crop science, equipment maintenance, spraying, tiling, etc.; there are the essential financial tasks to keep your operation funded. It is vital to the overall health of your farm to take care of a few yearly tasks: review financials, loan rates, marketing practices, and insurance.
1. Measure Liquidity:
Update your balance sheet and financial statements to see how your operation is balanced, here are some common ratios to keep in mind:
- Current Assets (target > 1.20): Current assets measures the ability to pay short term obligations. This is found by taking Current Asset Value/Current Debt Obligations.
- Working Capital to Expense (target > 15-20%): This is used to show the equity in the upcoming crop, found by taking [Current Assets – Current Liabilities]/Input Costs.
- Debt to Asset (target < 55%): The debt to asset ratio illustrates how much of the operation is leveraged. Calculate by taking Total Debts/Total Assets.
- Real Estate Loan-to-Value (RE LTV) (target < 60%): Loan to Value shows how much risk is being taken on a secured loan or the proportion of the property value a lender can finance. Calculated by taking Loan Amount/Real Estate Value.
By maintaining healthy ratios, your operation will be in a good position, even after an unprofitable year. Building liquidity is important during downturns in commodity prices and when your operation is trying to cash flow.
2. Check Rates:
Check your current lender’s interest rates and consider if refinancing would be beneficial. Also inquire with additional lenders regarding rates and financing options. The credit team at Conterra can provide a complimentary quote and can issue a preliminary loan approval after going through underwriting with no strings attached.
3. Review Marketing Practices:
Marketing is often overlooked as it can be somewhat complicated. Mitigating pricing risk can often be the difference between a positive and negative year on your cash flow. Locking in a profit is never a bad thing, holding out when prices are good and hauling directly from the field can work but with the volatile prices in today’s market it is risky. Make sure your marketing practices and crop revenue protection don’t double up on costs by covering the similar risks.
4. Consider Insurance Costs:
Revisiting your expenses every year is a must. Insurance costs are necessary, but question if you are getting the best deal for the coverage you need. Shop around for your farm insurance coverage to see which company is able to provide the policy you need for a good price. With projected prices, volatility, and weather; crop insurance is needed now more than ever. Revaluate your current protection and see which type of coverage fits your operation.
Taking the initial steps now to review basic finances and costs will protect your operation from a variety of events, both expected and unanticipated. Having an ag lender who is available to have open communication about current finances and how they relate to loan options can provide you the ability to make proactive decisions for your operation.
If you have questions about measuring liquidity or want to review current rates, start a conversation with Conterra Ag. Our lending products are designed with the cycles of agriculture in mind.