Four Steps to Expansion

September 23, 2009 07:00 PM
 

Greg Vincent, Top Producer Editor
 
Former Farm Credit Services of America (FCSA) financial officer turned financial consultant, Roger Schlitter thinks financial pressures may push some farms out of business and force others to contract their acreage in the coming year. While Schlitter recognizes this is difficult situation in rural America, someone will farm the ground and that means businesses in a good financial position may have opportunities to expand.
 
There's no one way to get to the top of the steps, Schlitter says. You have to be who you are. If you are mechanically inclined, owning older equipment may be a good proposition for you. For someone else, they may be better at marketing and can work with a marketing adviser to boost prices received. In any case, the key starts with the first step: find ways to improve your earnings and maximize working capital.
 
Step 1 Working Capital
Agood rule of thumb, particularly in light of the current world economic situation in which lenders scrutinize borrowers much more closely, is $200/acre working capital.
More, however, is better.
 
"Working capital is basically that top third of the balance sheet. It's the difference between the value of cash, grain, accounts receivable and livestock minus your current operating loans, accounts payable, rents payable, accrued interest and current principal portions of machinery and real estate debt payments” he says. "Operations with more than the minimum amount of working capital are the ones driving the market right now.”
 
Step 2 Secure the Cash
With current market volatility, however, assets in the bin pale in comparison to cash in hand. "The key is how secure is the value you have on that. Let's pick the last day of December and say we have a run on the market and corn is $4/bu. again. I told guys when land prices started ramping up, your balance sheet looks good and you have this high-value grain in inventory, then get some of that turned into cash and get rid of some of that debt.”
 
Step 3 Lock in Margins
Locking in input prices is just as important as locking in the sales price, especially with the recent variability in fertilizer. That's the place to start, he says. But it's also about managing your land payments and getting those to a workable level.
 
In 2008, when land prices were on the uptrend, Schlitter financed several farms. Today those customers may be thanking him for his encouraging them to have three different notes on that land. "I liked to set up a one-year note, a five-year note and the balance in 20-year notes. I wanted to get them to convert that paper equity into real money. There was $4.50/bu. corn out there, so I wanted them to just sell it [and pay off the short-term note]. Who gives a darn if it goes to $7/bu.—you've never sold $4.50/bu. corn in your life!”
 
Step 4 Balance Machinery Costs
Schlitter sees too many farmers concerned with managing tax payments when they should be concerned about managing machinery costs, and that cuts into their 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. The other guy is going to have more money available as working capital than you do. That $500,000 more in equipment had to come out of your working capital. You have to balance your capital spending.”
 

 
You can e-mail Greg Vincent at gvincent@farmjournal.com.

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