The coming year could be a bumpy ride for growers, livestock producers and other ag businesses. We’re already seeing higher input costs and rising interest rates leading to tighter margins.
With your 2022 winding down, planting and input decisions for next year are already on your mind. That means you should be updating risk-management plans and planning now for 2023’s working capital and cash-flow needs. Here are four proactive ways to prepare your business for 2023:
1. Get a jump on loan renewals.
With lower returns predicted, it’s likely that more producers than usual will be using lines of credit for their 2023 operat-ing needs. The heavier volume of loan applicants means lenders will be busy. They might do deeper dives into your financials and probably ask for more than they typically do.
Start organizing the data and documentation you’ll need to share with your lender. Update your balance sheets. Gather your tax returns. Pull together your cash-flow numbers. Prepare a budget that extends through the entire crop year, from when you purchase inputs, which could be this fall, to when you make your last sale, which could be as far out as the summer of 2024.
Don’t wait until the 11th hour to collect your loan documentation. Make a quick call to your lender to ask what information you should submit. Early preparation will significantly help you and your lender.
2. Take a proactive approach to help you respond to events you can’t always control.
Look at preserving profitability as much as possible against factors such as drought or input supply issues. Do you have a crop insurance or livestock loss program in place? What if you can’t get the parts or supplies you need for next year? If you lose your buyer or customer, where else could you sell? Work with a strategic adviser. Make sure it’s someone who won’t automatically say yes to your ideas but instead offers healthy challenges and helps you think both inside and outside of the box. And revisit that plan throughout the year.
3. Be careful about third-party financing through suppliers, equipment dealers or local co-ops.
Many offer deals or discounts on “cash upfront” purchases. Those can have their advantages, but think carefully about using other forms of credit to pay for them. Are you truly getting the 10% cash discount if you have to borrow from your line of credit with its 5% interest rate? There is growing concern that we could see more producers who have extended debt be-yond their repayment capacity. If you do have other lines of credit or third-party financing, disclose them to your lender.
4. Communication is critical.
It helps your lender understand your operation and builds trust and credibility. Maintain your connections with your lender during the year. The more they know, the better and more quickly they can help you.
