If a farmer puts pen to paper in 2022 and sees black, where should the potential profit be placed?
Speaking at Top Producer Summit in Nashville on Feb. 16, Ashley Arrington, director of real estate for Ag Resource Management, provided multiple scenarios.
First Defense
Profit on an agriculture operation is associated with two sets of expectations: banker vs. farmer.
A banker encourages a producer to build liquidity, leave cash in the farm account, or deleverage the balance sheet. A farmer sees a green light for deferred maintenance on equipment and buildings, or clean-up of payables, or buying opportunities.
Arrington suggested farmers consider a status question: What did the balance sheet look like pre-profit?
“How much working capital are you burning through?” Arrington asked. “The first line of defense against commodity volatility is working capital. What is your level now versus several years back? Did you cash out some real estate equity to make it through? How has your debt-to-asset ratio changed?”
The Online Top Producer Summit is set for Feb. 22-23 and will include live, on-demand and recorded sessions from the event in Nashville. Register now!
In order to rebuild a balance sheet, Arrington compared a balanced versus a nuclear approach. “It’s either a balanced approach or a nuclear approach where you grow as big as possible and contract if times get rough again. The nuclear can work in some cases, but the balanced works for the whole.”
Arrington provided a theoretical framework of profit management, emphasizing the percentage of each category is of secondary significance, but the order is of primary importance: 50% working capital, 30% additional debt reduction,10% deferred maintenance, and 10% personal. “Working capital is the most important to rebuild, because working capital is the first defense against price volatility. Debt reduction is second in importance, because regaining equity is your second line of defense.”
Arrington emphasized accountability. “Make a plan and put it on a spreadsheet and share it with your team. If the plan goes off the rails as time progresses, don’t throw it away, just fine-tune it.”
There is no one-fits-all approach, Arrington added in conclusion: “No matter what approach you take, the most important thing is to make sure you have a plan.”
The Online Top Producer Summit is set for Feb. 22-23 and will include live, on-demand and recorded sessions from the event in Nashville. Register now!
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