4 Tips to Manage Uncertainty, Risk and Interest Rates
No one — farmers included — can plan for everything the market doles out. However, there are steps you can take to help mitigate risk and alleviate uncertainties.
Steve Allard, chief credit officer with Farm Credit Mid-America, helps farmers manage through market uncertainties by controlling what they can and planning for what they can’t. Here, he offers tips for managing amid a less-than-optimal ag environment to make sure costs are managed, risk is reduced and adequate funds are available for expenses.
1. Manage input costs.
Adding fixed costs or more variable costs on inputs such as seed and chemicals, for example, affects an operation’s competitiveness. “There is a law of diminishing returns on inputs, so using good data to manage costs appropriately is important,” says Allard. “Really knowing the yield potential on the land you are farming and applying the appropriate amount of inputs to achieve reasonable yields is important in helping manage those variable costs.”
Considering looking at yield data over a 10- to 20-year period and fertilize as needed to achieve the best yield that’s likely in an average year. Compare your historical field data to university data to calculate the pounds of nutrients needed to produce a bushel of corn. Crop consultants, agronomists or land-grant universities are all resources that have data to determine ideal fertility rates.
2. Use facts to negotiate land rental costs.
Increasingly, farmers are negotiating with landlords for new rental terms. Depending upon the geography, there can be a certain amount of competition among farmers to acquire additional rental acres. Farmers must have a long-term view. Cash flows in 2015 — and likely in 2016 — will likely show modest or negative returns; but farmers believe that positive returns will surface again in the market.
“Farmers who approach landlords with good production records can show the true value of that rented land in relation to the price per bushel they are likely to receive in today’s commodity markets,” says Allard. “I’m not saying it’s going to be foolproof. Many times, there are farmers waiting in the wings to pay the rate you’re trying to negotiate down. But having good negotiating skills can help.”
3. Take advantage of the current interest rate environment.
Whether it’s discretionary spending, fixed operational costs or spending on variable input costs, have a firm handle on how much you are spending and why you are spending it. Locking in today’s lower interest rates by converting short-term variable-rate loans into long-term fully fixed-rate loans is an additional way to mitigate risk.
“When you can lock in interest rates over a longer period of time, it takes one variable off the table,” says Allard. “In times like these, when there are numerous changes and many moving parts, from a cash-flow perspective, locking in even one variable can be valuable.”
4. Talk with your lender about anticipated expenditures.
If you plan to make significant purchases using credit, have transparent discussions with your lender to talk through your anticipated spending, when it might occur, and the income you would expect to receive from marketing a crop or selling livestock to be able to pay loans down.
“This type of open communication allows you and your lender to reach an understanding of what the maximum lending needs should be, and work from those figures to make sure there are adequate funds throughout the year,” says Allard. “Good planning and ongoing dialogue can help things go smoothly and reduce any uncertainty you or your lender may have.”
Read more here and download the Farm Credit Mid-America Insights report.