Farmers’ financial positions continue to erode as commodity prices remain weak. USDA forecasts net farm income, a broad measure of profits, will decline nearly 7% from 2017 to just under $60 billion for this year. This would be its lowest in nominal terms since 2006. Net cash income is forecast to decline 5% to $91.9 billion—its lowest since 2009.
At the same time, farmers’ working capital is forecast at $56.2 billion in 2018, a 16% drop from 2017, and a result of declines in farm income and current assets coupled with an increase in debt.
Yet even with declining working capital, most farmers have kept their debt levels to a manageable level, says Gary Schnitkey, ag economist at the University of Illinois.
Farm debt is forecast to increase by 1% to $388.9 billion this year. That is led by an expected 1.2% jump in real-estate debt. The debt-to-asset and debt-to-equity ratios are about even with a year ago and well under the 1970 and 1980 levels.
Farmers should be proactive in managing these cash-flow shortages and working-capital declines, says Schnitkey, who spoke at USDA’s 2018 Agricultural Outlook Forum in Arlington, Va.
1. Project your cash flow. Regular financial analysis is key, especially as your projected costs turn to actual costs. “Your numbers will look tough, but at least you know where you are,” he says. (The University of Illinois has several online tools to help with your cash-flow planning.)
2. Analyze every cash-rental agreement. Based on records of more than 5,500 farm operators handled by local Farm Business Farm Management (FBFM) Associations across Illinois, Schnitkey says, most cash rented ground is generating low to negative returns.
Share your financial situation with your landlords, he recommends. Use this as a basis to discuss a drop in rent.
“Also look at a move to a variable cash rent lease,” he says. “It is really hard to know what incomes will be like. Variable cash rents are a good alternative in this environment.”
3. Look at every expense to identify cost savings. Most farmers have been looking at cost cutting for the past several years. What is left to cut? Schnitkey says you should look hard at your seed costs to see if there are options to choose less-expensive varieties.
Also evaluate your Nitrogen fertilizer rates. “A lot of farmers put on a lot more Nitrogen than universities would suggest,” he says.
4. Develop and stick to a grain marketing plan. Schnitkey says a solid plan should include time and price triggers for sales, which will help you overcome the emotional aspects of marketing.
“You’re not going to hit the high, so don’t even try,” he says. “Don’t beat yourself up if the price goes up after you make the sale. Have some benchmarks that you have in certain times of the year. That may be 10% by Jan 1., 20% by March 15, etc.”
5. Ask your lender pointed questions. During tough financial times, advice and analysis from your key advisors is key.
Schnitkey suggests asking your banker: What improvements would you like to see? What are your working capital standards, and how close am I to reaching a concerning levels? What would overall strengthen my lending portfolio to you?
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