Why Having A Financial Plan Is More Important Now
Having a financial plan in place has always been important for a farm operation, but in years predicted to have thin margins, it’s essential. And while predictions for exactly what the growing season will bring are unclear, Mike Gunderson, chief credit officer at Farm Credit Illinois, says it’s no excuse to avoid going through your financials.
“One piece of pushback I get from farmers when I talk to them about budgeting is they don't know how many bushels they're going to grow this year, the weather or what price they're going to receive. And I just remind them, it's a budget, not an income statement,” he says.
Gunderson says the plan you make serves as a starting point, not a finishing point. It is bound to change throughout the year, but it’s key to understand how to minimize costs while maximizing production. If you aren’t sure where to start, he recommends finding a template from a source such as Purdue University or FarmDoc at the University of Illinois.
What To Include
As you begin putting the plan together, Tanner Hoffman, associate vice president at Clutch and a Nebraska farmer, advises to take even the smallest component seriously this year – even if you don’t think you have the time to.
“It's important every sort of variable is considered with a little bit more scrutiny, because it could be death by 1,000 paper cuts if you miss a little bit of marketing, a little bit on financing, a little bit on inputs and a little bit on timing in the field,” Hoffman says. “All those things add up now and there's just not enough margin to keep you going.”
He suggests starting at the operations level, and then figuring out your costs and breakevens on a field- or crop-level basis.
“Think beyond the seed, fertilizer and chemical inputs. That’s your insurance, equipment and labor expenses. These things can be the true difference between profit and loss,” he says. “Another important consideration is family living expenses. You’ve got to pay your mortgage, put food on the table and take care of all of the family bills. If you don’t include that, it can be really tough.”
Hoffman adds some operations want to look at the operation’s profit and loss by itself and carve out a separate family budget, but says it should still be considered either way.
Once all of your costs are taken into account, Gunderson says to look at your last few years of average yields, or the USDA’s current yield projections, alongside commodity prices to get an idea for income.
Where to Make Room
If the operation’s budget is looking grim at this point, Gunderson shares three places he would take a closer look at:
1. Cash rents
He says the first place to start when making more room in the annual budget is cash rent values.
“I know those aren’t our favorite conversation to have, but if landlords renegotiated rents up while money prices were climbing, then we ought to be able to have a serious conversation about cash rents that are in line with the market environment we're in today,” Gunderson says.
2. Equipment upgrades
Next is to optimize your equipment fleet.
“If you’ve been accustomed to buying new equipment every year, there might be an opportunity to pare down on those purchases – especially if your fleet is appropriately sized for the scale of the operation,” Gunderson advises.
3. Ask your agronomist
Gunderson’s third step is to talk to the experts who know your operation well.
“There's going to be a combination of seeds, fertilizer and chemicals that will influence the productivity of that crop on that particular farm and its soil,” he says. “I could reduce fertilizer expenses, but if the soil is in need of nutrients that might not be the best place for to cut back.”
At the same time, Tony Jesina, senior vice president of insurance for Farm Credit Services of America, says risk management is an important piece to avoid scaling back on.
“Risk management is an area some people may be tempted to cut back and say ‘well I'll just take less crop insurance’,” Jesina says. “I think that’s pretty dangerous. We're already going to struggle to cover breakevens the way it is, and so trying to save your way to prosperity is pretty tough.”
Whether it’s for help making your plan, updating it, or cutting back, the experts recommend keeping your team of advisors in the loop.
“Stay in close conversation with your financial officer and your crop insurance agent. They should be your informal board of directors,” Jesina says. “As the year evolves, they are going to be instrumental in helping you evaluate the situation.”
