4 Steps to Expansion

October 9, 2009 04:17 PM

In 37 years as a financial officer for Farm Credit Services of America (FCSA), Roger Schlitter operated with one simple axiom: "It's performance that counts. If you perform financially and ethically, you'll get the money you need."

The early expectations are for 2010 costs of production to be well above the anticipated selling price for corn and soybeans, meaning top performance will be more difficult.

If your finances are in shape, there will  likely be opportunities for expansion as some farms may be forced out of business, says Schlitter, who now owns and operates Roger's Farm Financial in Mason City, Iowa.

There's no one way to get to the top of the steps, he says. You need to be true to who you are.  In any case, the key starts with the first step: Find ways to improve your earnings and maximize working capital.

1. Working Capital  The commodity price run-up and the inputs to produce them have drastically changed the way lenders view working capital. Today Schlitter says a good rule of thumb, particularly in light of the situation in which lenders scrutinize borrowers more closely, is $200/acre. More, however, is better.

"Working capital is the difference between cash value, grain, accounts receivable and livestock minus current operating loans, accounts payable, rents payable, accrued interest and current principal portions of machinery and real estate payments," he says. "Those with more than the minimum working capital are driving the market right now."

For example, he knows of a landlord who demanded a rent increase for a large tract of land in 2010. The land is at the top of the market, but the farmer operates with strong working capital and decided to absorb the added cost rather than give up the land.

2. Secure Cash With market volatility, cash in hand is key. "How secure is the value? Let's say we have a run on the market and corn is $4/bu. If your balance sheet is good and you have this high-value grain in inventory, then get it turned into cash and get rid of some of that debt."

Any size of operation can do this. One Farm Credit customer farmed 500 acres and farrowed 2,000 pigs. He locked in prices to protect his earnings and secured an extra $75,000. He had his best year ever.

"When people see prices that are pretty doggone good, they better do something about it."

3.  Lock in Margins Managing land payments are as important as locking in inputs and selling price. "A few years ago $150 in real estate payments was plenty. But a year or two ago it was $200 to $250/acre payments. If we roll grain prices to $2.69/bu. for December corn futures, that means probably $2.25/bu. locally. You can't support $225 to $250 land payments at those prices," Schlitter says.

In 2008, he financed several farms with three notes. "I did a lot on a one-year note, a five-year note and the balance in 20-year notes. I wanted them to convert paper equity into real money. With $4.50/bu. corn, I wanted them to sell it and pay off short-term notes. Who cares if it goes to $7/bu.—you've never sold $4.50/bu. corn in your life!"

4. Balance Machinery Costs Far too many farmers try to manage tax payments when they should be concerned with managing machinery costs. That cuts into working capital.

"That's a dead-end proposition. You cannot own $1 million in machinery and farm the same acres as a guy who is doing it with $500,000. That $500,000 more in equipment had to come out of your working capital. You have to balance your capital spending."

> Schlitter will present a breakout session at the 2010 Top Producer Seminar. The topic is: What Farmers Need to Know About Banking. Click here for more information on the Top Producer Seminar.

Top Producer, October 2009

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