Federal Reserve surveys show farm income has declined over the last couple of months, but you already knew that. The reserve reports indicate lenders are going to be paying extra close attention to working capital next year. Reducing your family living expenses could help you when it comes time to take out an operating loan.
The report stated: “Expectations of further slumps in farm income have led agricultural lenders to continue to stress the importance of maintaining adequate levels of working capital, especially for highly leveraged producers.”
Most farm businesses are large enough now that reducing family living expenses won’t significantly improve the balance sheet, according to Bob Milligan, a senior consultant with Dairy Strategies, LLC. So what’s the big deal? Lenders very much care about your living expenses because they can be a huge driver of working capital. Monthly draws are something anyone hoping to take out an operating loan in 2016 should look at because they directly impact cash flow.
“One of the things people like, including bankers, is that you pay your bills,” Milligan says. “That’s when family living and cash flow become issues in a downturn.” Mulligan is also a former professor and associate chair of the Department of Applied Economics and Management at Cornell University.
Average annual noncapital living expenses for Illinois farm families increased nearly $10,000 from 2011 to last year, according to an Illinois Farm Business Farm Management Association study. Illinois farm families on average lived on $81,711 in 2014, up from $71,929 in 2011, according to the study. Farm families today are living on larger budgets than ever before, but that won’t likely last forever.
Matt Bennett, a farmer and grain marketing consultant with Bennett Consulting, says that farmers should be prepared for the downturn. Being realistic about family living expenses might mean giving up some luxuries to improve the balance sheet. For instance, says Bennett, some families might reconsider their needs by thinking like this: “Maybe it’s time we think about selling the boat.”
Financial management and business strategy are keys for growing a successful farm, says Milligan.
“One of the real lessons of strategy is that unless you just don’t have the capital to survive, if your business is financially feasible, whether it’s a good year or a bad year shouldn’t impact you,” he says.
He encourages producers to take a close look at their business and analyze where they can increase their working capital, the best place might be family living expenses.
Learn more about the recent report on farm income from the Federal Reserve in this segment of “AgDay”: