Five Ways to Protect Your Farm in the Economy Crunch

September 20, 2008 07:00 PM
 

Sara Muri, Top Producer Business & Crops Online Editor
 
The current state of the U.S. economy may have you a little nervous about the financial future of your farming operation, and probably for a good reason. "It is not business as usual,” says Allen Lash, of Agrisolutions in Brighton, Ill. "This is a new world for farm people.”
 
Even with the economy's uncertainty, you can protect your farming business. Agricultural risk and agribusiness experts provide the following methods to position your operation to be safe and profitable.
 
1. Keep the Worrying to a Minimal
Bret Oelke, agricultural business management extension educator at the University of Minnesota, says that so far the economy has had a psychological effect on the farming community. "Farmers are watching what's going on and are getting nervous,” he says.
 
But, Oelke says, the farming industry hasn't been hit too hard yet by the unsteady market. He suggests waiting to see how things play out. "You need to make a conscious decision not to let things bother you,” Oelke says. "We just need to work through it and hope the domino effect doesn't have any bigger impacts.”
 
He says producers need to make sure they are doing a thoughtful job of planning for marketing, managing costs of production and positioning their operations for opportunities that will present themselves in times of turmoil. "My grandpa told me ‘don't worry about the things that you can't change, worry about the things you can.'” Oelke says. 
 
 
2. ‘Bulletproof Your Balance Sheet'
Greg Wolf, an agriculture consultant for Kennedy and Coe LLC in Pratt, Kan., says some tried and true advice for farmer facing uncertain markets is to "bulletproof your balance sheet.” He says this means strengthening both your net worth and working capital, to create strength and flexibility.
 
Wolf says producers should ask themselves: "Do I understand the risk exposure of my balance sheet?  If my banking relationship were threatened for any reason, how bankable am I?” He says knowing these answers will help producers in both a negative or positive economic situation.
 
 
3. Be Willing to Sell Your Crops at High Prices
Lash says a key way farmers can increase their profit is to sell their crops at higher prices. "Farmers had the opportunity to sell corn at $7 a bushel, but how many did that?” he says. "You can't miss those opportunities.”
He says the key is to follow these two steps:
 
  1. Know with certainty your costs (not someone else's or university estimates).
  2. Define an acceptable profit level and sell at least some at those levels. 
     
4. Evaluate Your Business Strategies
Build Your Working Capital
Lash says the current agricultural economy, caused from unparallel profits, provides an outstanding opportunity to build working capital.

He believes producers should use this profit in the following priority:
  1. Pay reasonable amounts of income tax (rates may be higher in 2009)
  2. Build working capital.
  3. Infrastructure investment that adds revenue or value (equipment, land, toys)
Wolf says many marketing challenges have been created due to the current downslide of the economy. He says with the heightened awareness of risk, everyone in the market is asking questions about who will bear the additional marketing risks.
 
He also says it's time for producers to ask: "Is it time to double down on growth for the next generation, or to draw back with ‘profit taking' while the opportunity is available, or one of the myriad strategic responses in between?”
 
"Perhaps most important,” Wolf says, "is keeping your eyes wide open toward business fundamentals.”
 
 
5. Have Adequate Working Capital
"The cheap U.S. dollar is impacting us in two ways,” says Lash. "It's a double-edged sword.” He says the cheap dollar assists farmers in selling crops to foreign countries. But, input costs are also increased for imported inputs, such as: fertilizer, fuel and products manufactured from petroleum.
 
With the volatility for both crop prices and costs, many lenders are requiring more working capital from producers. Traditionally, lenders required about 15% of revenue for working capital, but, Lash says, some are now moving to 20%. He says banks are doing this because of the higher revenues farmers are generating along with the risk they are incurring and the volatile market.
 
"Farmers need to have adequate working capital,” Lash says. He says to achieve this, farmers may need to put off buying more land or new equipment until their working capital is at acceptable levels.
 

 
You can e-mail Sara Muri at smuri@farmjournal.com.
 

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