Intermediate-term debt chases more farmers out of business than any other risk factor.
Financial risk remains the biggest hurdle most producers face each year. In profitable times, there is always the temptation to add more acreage or buy new equipment. While sometimes it makes more sense to purchase land than to rent, such a decision should be made in light of a farm’s five-year and ten-year plans, and a good hard look at the farm balance sheet. With cash on hand, most operations can survive hardships.
In the good years, Matt Manuel, Conterra Ag Capital relationship manger, recommends setting aside money to withstand future downturns. No matter how alluring it is to spend cash on hand, the wise producer first builds liquidity and solvency on the ledger sheet by maintaining a strong cash position.
Strategizing profit for the long haul
“Plan. Get organized,” Matt advises producers during profitable years.
Producers should work to build operational cash flow that will provide the flexibility to overcome financial risk as it arises. Working with a knowledgeable ag lender and a Certified Public Accountant (CPA) who knows farming is a good place to start any risk-reduction program. Matt hesitates when he sees producers trying to run their farm and ranch operations through their personal tax returns — a huge risk factor.
When an operation’s finances are organized, everything else falls into place and risk of disaster drops. That’s not to say risk disappears; farming itself is a risk. However, like downhill skiing, there is a hierarchy of risk – some risks are comparable to easy bunny slopes, some are more common tourist trail risks, some risks are better left to experts and some risks will get your farm in the news. Think of poorly handled intermediate-term debt in that latter category.
“It’s simple — risk is completely unavoidable in agriculture,” Matt says. “However, to some level, risk is manageable.”
The first step is to have a firm farm financial plan. Build it with an ag-oriented CPA and an ag lender with the flexibility to provide capital to cover cash flow needs in high-risk times. From a banking perspective, failure to plan is a red flag that can hurt a producer’s credit worthiness.
Secondly, get crop insurance. A key piece of any good financial risk management plan is crop yield and revenue protection. While this varies by crop and geography, revenue protection is vital to reduce risk. In an area with good rainfall and active markets, 70%– 75% crop insurance coverage may be plenty. In an area like the panhandle of West Texas, where windstorms are common and drought is a regular issue, it might be wiser to go to 80% or even 85% coverage.
Third, forward contract your crops where possible. Start by having a firm grasp on what the current year’s cropping breakout will look like. Then, pre-sell at least enough of the crop to cover costs. It won’t eliminate risk, but it certainly will make any risk more manageable.
Additionally, take advantage of government payment programs to maximize revenue opportunities in years they are available.
Avoiding future risks
Looking down the road, it is always a fiscally sound idea to set aside money for the future. A meeting with an ag lender to review the operation’s debt structure is a good place to start. According to Matt, an ag lender like Conterra offers both long term loans and short-term, interest-only financing, which allows more flexibility than other ag lending options.
“Operational cash flow provides flexibility,” Matt concludes. “And that’s the key to risk management.”