If you ask farmers about the last major storm that damaged their crops or the best (or worst) grain sale they’ve ever made, they’ll probably recall every detail. Yet, planning for what the future might bring can sometimes feel less certain. That’s where farm stress testing comes in.
Stress testing is a financial tool that helps assess how a business or operation might perform under adverse conditions or challenging scenarios. In the context of farming, stress testing involves analyzing an operation’s financial health and resilience by simulating situations that could impact revenue or increase costs—like a significant drop in commodity prices, spikes in input costs (such as fuel or fertilizer), or sudden changes in interest rates.
The goal of stress testing is to identify potential financial vulnerabilities so that a farmer can plan for how to manage these situations. By stress testing, farmers can make adjustments in advance, such as securing additional working capital or restructuring debt, which can strengthen the farm’s ability to survive tough times and maintain financial stability. Here’s why stress testing is an essential tool for any operation aiming to grow and remain resilient.
1. Exposing Vulnerabilities in Your Operation
Farm stress testing identifies the “what-if” scenarios that could significantly impact your business. This process helps farmers pinpoint areas where their operation may struggle to meet expenses or maintain profitability under adverse conditions. It’s not always comfortable to think about, but it’s an important exercise in understanding how your operation might withstand various financial pressures.
“Stress testing helps us spot the factors that could cause business challenges, highlighting where we’re vulnerable and how we might be able to address those weak spots,” says Jim Davis, Conterra Vice President Relationship Manager. Once vulnerabilities are identified, farmers can then take proactive steps, such as securing additional liquidity or diversifying their crop mix, to shore up these weak areas and increase overall financial resilience.
2. Value for Both the Short and Long Term
Unexpected increases in fuel costs or interest rates, for example, can put pressure on operating capital and raise borrowing needs. Through stress testing, you can gauge how these factors might impact your budget, allowing you to prepare proactively and avoid financial strain.
Stress testing is valuable for both the short and long term because it prepares a farm operation to handle immediate challenges while laying the groundwork for lasting financial health. In the short term, stress testing helps identify the financial impact of sudden cost increases, like fuel or fertilizer, and enables farmers to adapt quickly, possibly by adjusting spending or borrowing needs to maintain liquidity.
“If fuel prices suddenly spike, it’s not just your fuel costs that go up – fertilizer costs rise too,” Davis explains. “You might end up tapping into your line of credit more than planned, which impacts both your current expenses and the interest costs on your operations in the long run.” Stress testing can highlight these impacts before they hit, enabling you to make more informed financial decisions.
For the long term, stress testing highlights trends that could affect an operation’s profitability over time. By revealing the impact of ongoing variables—such as rising interest rates or shifts in market demand—farmers can make informed adjustments to safeguard their working capital and optimize their financial strategies, ultimately setting their operation up for greater resilience and growth in the years to come.
3. Seeing the Big Picture of Your Operation
Stress testing also reveals opportunities and efficiencies across your farm. For example, in the Pacific Northwest, many farms grow a variety of crops. Davis shared a story of one farmer who discovered that 300 acres within his rotation were never profitable.
“After running the stress test, he saw those acres just weren’t going to turn a profit. So, he took them out of his rotation, freeing up resources and strengthening his financial position overall,” recounted Davis. These insights can lead to shifts that increase efficiency across your entire operation.
Stress testing helps you see the big picture by revealing how different parts of your operation respond to potential challenges, whether they’re financial, environmental, or market based. It allows you to assess how shifts in one area, like an unexpected spike in input costs or a drop in commodity prices, impact your overall cash flow and profitability.
By stress testing, you gain insights into how well your entire operation would hold up under various pressures, helping you make strategic decisions that strengthen your business. It’s a tool that brings together details about cash flow, expenses, and risk to give you a holistic view, so you can plan confidently and proactively for long-term stability.
4. Supporting Confident Decision-Making
One of the biggest benefits of stress testing is that it gives you clarity and confidence in making important financial decisions. By understanding potential challenges ahead of time, you can evaluate options like refinancing, adjusting your crop mix, or reallocating resources based on how each choice would affect your working capital and long-term viability.
For instance, many farmers consider owned land as their best source of capital. “If you’re dealing with tight margins and high debt service, it could make sense to refinance some of your land at historically low rates. Or, if a 40-acre parcel isn’t performing well, maybe selling it would generate the cash flow needed to support other parts of your operation,” Davis notes. Stress testing brings clarity to these decisions, giving you confidence in the steps you’re taking.
Stress testing equips you with the insights needed to navigate the uncertainties in agriculture. You are prepared to not just react to challenges as they arise—you’re proactively shaping a strategy that helps you move forward with certainty, knowing you’ve accounted for both best- and worst-case outcomes. This foresight allows you to make informed, data-backed decisions that keep your operation resilient, even in volatile conditions.
Read Part 2: Stress Testing Your Farm: 4 Essential Steps for additional insight.
Conterra Ag Capital is dedicated to financing American agriculture, offering specialized agricultural loan products tailored to meet the specific needs of farmers and ranchers nationwide. With a team of experienced relationship managers strategically located across the country, we provide regional expertise and personalized service to our clients. Whether you’re a seasoned producer or new to the industry, Conterra is committed to supporting your agricultural endeavors. Our people, products, and process-driven approach to lending makes us unique.
Disclaimer: Please note that the information provided in this article is for educational and informational purposes only, and should not be construed as financial or investment advice. While we have made every effort to ensure the accuracy and reliability of the information presented, Conterra Ag Capital and its affiliates make no representation or warranty as to the completeness, correctness, timeliness, suitability, or validity of any information contained in this article. You should always consult a qualified financial advisor, tax professional, or other qualified professional for advice on your specific financial situation.
