Build A Big-Picture Budget

October 26, 2016 02:19 AM
 
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Forecast several price outcomes, buy with rebates and more

If you come to a fork in the road, you’re likely to take the path you’ve traveled before—or, in lieu of that, whichever direction GPS tells you to go. Yet when it comes to forecasting the right way forward for the financial health of your farm operation, the options can be a little murkier. 

To adequately manage risk for your farm, it can be helpful to scrutinize every line item and be proactive about keeping costs down. That way, the strategies you devise can be applied regardless of what the markets and Mother Nature throw your way. 

“It doesn’t matter to me what prices are, really,” says Darren Armstrong, who grows corn, soybeans and wheat on 9,700 acres with his dad and two brothers in the Blacklands coastal region of Hyde County, N.C. “I’m continually shopping inputs and fuel, and I try to cut where I can everywhere, whether [corn] is $8 a bushel or $3 a bushel.”

In part, his aversion to commodity-price hand-wringing stems from his location. Armstrong’s low-lying acres are situated near the Atlantic Ocean and felt the impact of heavy rains from Hurricane Matthew earlier this month. 

A former neighbor’s advice on the weather, in his mind, holds true for the ever-shifting factors that affect his budget: “There’s no such thing as bad weather, there’s just different weather. We’ve got to have all of it.”

In Hazelton, N.D., producer Mike Appert is budgeting for 2017 by doing an independent review of fixed and variable costs. He pays particular attention to the latter because he can “chisel them down” with a greater degree of flexibility.

He is particularly attuned to opportunities surrounding cash rents. In his area, he expects rents will come down another 5% to 10% in the new year. Lower rates on seeds, chemicals and other variable costs can’t begin to make the dent in his budget that lower rents can.

“None of it takes up that big gap because there’s still such a margin gap if land doesn’t absorb some,” Appert points out.

He anticipates some farmers won’t get their loans renewed in the year ahead, which could nudge rents lower in the spring as landowners stick with trusted producers whose checks won’t bounce.

Crunch The Numbers. The more time you spend on a budget, the better off your banker and your farm will be. On Armstrong’s operation, one way he finds breathing room is to meticulously compare input providers’ rebate programs. He can get a check at the end of the coming season if he spends preplant time comparing input providers’ rebate programs.“We have worms in the soybeans,” he explains. “[If] I have two choices and both products are compatible, I’ll ask myself, ‘Will one of these products work toward my rebate program?’ and get more bang for the buck … . There’s really a lot of money there if you are patient and will take the time to learn what the program is. Of course, a huge help is seed salesmen and chemical salesmen at your local co-op.”

He also sits down in December each year with his CPA and a friend who is a retired ag lender to evaluate what went right—and wrong—on the farm in the past 12 months. Then they create projections for the coming season based on past input figures, fuel costs, interest rates, labor expenses and more. 

Underlying everything is a focus on getting the highest yields, cutting needless expenses and not budging on investments that will translate to better production potential.

“Some of the stuff you can pinpoint pretty accurately, other things it’s a little bit of a guess,” Armstrong acknowledges. 

Amid the tight revenues of the past year, his team has kept a much closer eye on even little expenses in town such as window cleaner, shop towels and oil and air filters to be as conservative as possible. 

Armstrong also revisits the budget again in March, when his operating line with AgCarolina Farm Credit renews, to update financial figures as needed, and he works closely on hedging with his adviser.

From week to week, Armstrong makes a point of spending more time in the office than he did earlier in his career to ensure the information his team is inputting into QuickBooks matches with what is happening in the field.  

“Don’t blow off the record-keeping part of it,” Armstrong advises other producers. “I know it’s not the sexiest part of farming. It’s not the most fun. But if you don’t have that right, you’re not going to get where you want to be.” 


Why You Need At Least Three Different Budget Scenarios to Plan Your Year

Focusing only on one financial scenario for your farm means you risk putting too many eggs in the same basket. Experts such as Mike Boehlje, ag economist at Purdue University, recommend a more comprehensive approach to budgeting. He advises writing down a strategy for at least three scenarios—one in which your expectations about yields and commodity prices come true, one in which yields and prices are better than you expect and one in which they’re worse than you anticipated.

“The important ‘P’ word is not ‘predicting’ the future, it’s ‘positioning’ for the challenges as well as the opportunities,” Boehlje says. 

Think through each scenario with your management team and decide on the trigger points at which you will make sales and other key decisions. Also identify the factors you will watch to decide which of your scenarios is coming to fruition. Farmers should review their scenarios once per week as weather and market conditions change, he recommends.

“You don’t put a single plan together and throw it in the drawer and forget about it,” Boehlje cautions.

 

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