When your banker pulls down the driveway to take the keys to your farm, it’s too late. One in 10 bankers expect farm foreclosures to be the biggest challenge facing agriculture in 2018, according to the Creighton University’s Rural Main Street Index in October.
To avoid some painful decisions in the future, experts recommend analyzing your books now. If some sort of liquidation is the only answer, keep in mind that selling all of your livestock isn’t the only option.
If you operate a dairy, and it isn’t working to milk 800 cows in a rented facility, there could be alternatives. You might quit milking cows and become a heifer grower. You could opt to focus more closely on cropping or reducing your farmland acreage. If you own the milking facility, you could lease it out.
“It really all comes down to scenario planning,” says Sam Miller, an ag lender with BMO Harris Bank. “Start with a visit to your tax professional to understand the tax implications of liquidation.”
Good business managers address signs of financial trouble.
“I don’t see getting out of business as failure,” says Matt Lange, a dairy consultant with Compeer Financial. “If you recognize the business model you have today is not working and you’re doing something proactive to change that, that’s not failure. That’s being a good business manager.” –Anna-Lisa Laca
Three Wise Money Tactics
Several financial practices can help you identify and address systemic issues in your farm business, whether you milk cows or grow crops.
Keep Tabs On Cash Flow. Cash is often where long-term problems are felt most, says Matt Lange, a dairy consultant with Compeer Financial. “Every month, you should know what your checkbook balance is, what you’ve got for availability on your operating loan, what you’ve got for payables, in addition to any big cash expenses in the future,” he says. “Usually, a first sign of distress is, ‘We don’t have enough cash for this fall.’”
Evaluate Your Cost of Production. If you’re having regular cash-flow problems, the first place you should look is cost of production, says Sam Miller, an ag lender with BMO Harris Bank. “If your cost of production is well above your peers’, that’s a sign that something is wrong,” Miller says. Lange advises producers to know their cost of production and be aware of which costs can be reduced and which are fixed.
Avoid Depleting The Balance Sheet. Determine where your balance sheet stood a few years ago, where it is today and what it will look like in 2018. Some dairy herds have lost 5% to 10% equity over the past few years, Lange says. “Maybe you were sitting at 55% owner equity and comfortable with where things were at, but now you could be at 45%. Given the futures markets for next year, that number could get even worse,” he says. “If we’re not able to even break even, we seriously need to have the discussion of how to begin to evaluate the liquidation process.”