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Make Adjustments Now to Optimize 2019 Profitability

We recently sponsored a webinar “Sorting Through the Implications of a Wet, Slow Spring,” featuring Agriculture Economic Insights co-founders Brent Gloy and David Widmar. Below we summarize the steps they outlined for adjusting to planting and market changes.

Even if your operation hasn’t been directly impacted, this year’s slow, wet spring has changed prospects for 2019, and your initial profitability projections likely are outdated. It’s time to reassess where you are financially and make adjustments where needed to optimize your marketing results in 2019.

Start by writing a summary of what has happened on your farm, said David Widmar: “What got planted, what didn’t? What lessons did you learn from this year? What would you do differently?”

This exercise is a good investment of your time, Widmar said, because it helps you think through the decisions you ultimately make and also serves as a reminder of timing — your thinking at the time and how the wet spring played out.

Now move onto the critical task of updating your operating budget, something that should be a standard, annual activity, said Brent Gloy. Compare what you planned to spend for seed, fertilizer, crop protection, etc. and what you actually paid. Make per-acre adjustments based on actual acreage. Combined with updated yield projections, you can reassess your break-even price per bushel.

“Some people may be in a good place now,” Gloy said. “Prices certainly have improved and maybe their crop is looking pretty good. If you have the chance to make some money this year, you want to take advantage of it and replenish some of your working capital.”

If you have a prevented-planting claim, ask your crop insurance officer to help you figure what your payment will be, Widmar recommended.

“This income can affect the minimum, or target, price you’ll need for your production,” he said.

With an adjusted breakeven as a starting place, review and update your marketing plans. Much has changed over the course of the spring, and expectations for marketing opportunities need to adjust as well, Widmar said. Corn and soybean prices, for example, rallied about $1 per bushel in the face of repeated delays and the corn stocks-to-use tightened from ample at 17% to a possible need for rationing at 12%.

 

corn december futures

CORN May June

Change

Acres planted (mil.) 92.8 89.8 -3
Acres harvested (mil.) 85.4 82.4 -3
Yield (bu./A) 176 166 -10
Begin stocks (bil.) 2.095 2.195 +.10
Production (bil.) 15.03 13.680 -1.35
Imports (mil.) 35 50 +15
Total supply (bil.) 17.160 15.925 -1.235
Total use (bil.) 14.675 14.250 -.425
End stocks (bil.) 2.485 1.675 -.81
Stocks/use 17% 12% -5 percentage points

 

Among the questions to ask yourself: Have you locked in some higher prices? Did the priced percentage of your expected crop change much with your acreage and expected yield? Do you need to sell less or more — or change the tool you use for pricing to allow for more uncertainty?

You now are ready to update your financial projections. In addition to cash-flow and income statements, it is important to update balance sheet projections, Widmar said. USDA estimates producers’ working capital has decreased 25% in the past few years and has reached a critical point at the national level. When there is a crop loss like many producers are experiencing, working capital can further erode, although crop insurance can help mitigate the impact.

Gloy urges producers to use their updated information to have constructive conversations with trusted advisors. Lenders and grain marketers can take a lot of the emotion out of the situation because they likely are less emotionally involved, he said.

“They may have ideas about how you can improve your outcome this year,” he said. “And in any case, you can avoid surprises later.”

statement of cash flows

Using the Power of Cash Flow Projections to Manage Your Business

A cash-flow projection is an important financial tool used to estimate the amount and timing of cash inflows and outflows. How a projection matches up with the actual cash flow in a given month tells whether you have excess funds to save for another month, use to pay down debt or jump on an opportunity.

It also helps you determine the size of an operating loan you will need.

As the operating cycle you’ve planned progresses, the projection is replaced by actual results. This information can alert you to changes you may have not expected. Additionally, having an accurate, near-real-time cash flow often improves the speed and quality of your operational decisions.

“In January, my dad was offered an opportunity to buy a pen of calves. He needed to know immediately,” said JR Wasserburger, a fourth-generation cattleman. “Because we keep our cash flow up to date, I was able to look at our records via my phone and tell him the amount we had available in less than two minutes.”

Knowledge is power

That kind of knowledge is power, yet less than a quarter of producers prepare a cash flow statement, according to Bob Schmidt, a senior vice president with Frontier Farm Credit. He listed the following as additional benefits to cash flow projections and updates:

  • A roadmap to guide operation decisions
  • Awareness that allows you to market commodities in a timely manner
  • The root of financial acumen in any business, and particularly agriculture: It translates to the balance sheet, working capital; it is foundational to all other key metrics.

Schmidt notes that MagnifySM, an ag financial management tool available through Frontier Farm Credit, can help producers create and track cash flow projections. “Magnify delivers a comprehensive picture of anticipated cash flow, profitability and working capital to aid decision-making,” he says. Among other things, it can help producers create budgets and provides automatic updates through the year to help them view cash flow and profitability throughout the year.”

“Building cash flow projections is an important component of the work we do with young farmers and ranchers,” added Carl Horne, vice president of customer solutions for Frontier Farm Credit. “Starting an operating cycle with a plan and having the ability to keep that information updated is a critical management capability.”

“The importance of cash flow lies in monitoring operating performance during the year rather than after the fact,” said Dick Zach, vice president of credit with Frontier Farm Credit. “This allows you to determine whether adjustments need to be made proactively during the cycle.”

Cattleman Wasserburger can attest to that. “Every month, we monitor to see if we are on target to make our goals, and to see if our practices make sense,” he said. “We had planned to sell hay in January, but it didn’t happen. Our cash flow reminded us to see that it did in February.”

As another example, they typically kept steers from their cow/calf operation into January and sold them at 900-1,000 lb. “We saw that the last three years, we fed a lot of hay and feed to those cattle, yet the price we got was about the same as if we sold on December 1. This year, we did sell in December and saved on the hay and feed.”

The marketing link

Cash flow goes hand-in-hand with “cost of production,” added Bob Campbell, a Frontier Farm Credit senior vice president. “If you calculate your cost of production, you will know the price you need for your production to break even. Then, your cash flow will tell you when you need the income so you can proactively create the needed cash flow.”

Campbell recommends using your APH history or historical production averages for livestock, then updating figures through the season, both to reflect how production is shaping up and sales you have made. “Ask yourself, what’s my break-even today? How does that align with market prices during the seasonally strong period?”

“The goal is to not be forced to sell just to meet cash needs,” said Campbell. “Planning ahead and knowing your cash position will inform those decisions.”

The bottom line

“Cash is the lifeblood of an operation,” Zach said. “Producers need to manage the flow of cash to cover normal expenses, debt service and living costs. Through timing of inventory sales, incoming payments and borrowed funds, a manager can assure there is sufficient cash on hand to cover those outflows.”

That’s the short-term goal at the Wasserburger ranch. The long-term goal is to keep the ranch in the family.

“Our land was homesteaded in 1886; we still have the original document. We’d like to keep that in the family. My son will be the fifth generation on the ranch. I partly credit our record keeping. It opens the door to discussions we wouldn’t have otherwise. I’ve watched several friends and neighbors who hardly talk to their family and stand to lose that tie to the ground.”

“Investing the time to build and maintain a cash flow can pay big dividends for improving your management capabilities,” Horne noted. “Get the support and guidance you need to add this to your financial toolkit. Our financial experts are ready to help.”

Side by Side 2017

Know Where You Are To Get Where You Want To Be

Dr. David Kohl, professor emeritus at Virginia Tech, spoke recently to some of our young and beginning producers about financial management strategies that every agricultural operation should practice. One of his assignments to the producers draws on his own practice as a partner in a dairy and creamery, Homestead Creamery.

Farm life, for many, slows down in November and December, giving producers the time they need to focus on good financial management. This would be a good time for you to assess where you stand financially as you wind down one year and start developing projections for the next.

At Homestead Creamery, the Friday after Thanksgiving marks the start of a financial planning process that culminates in a “Groundhog Day Game Plan.” The process looks like this:

Manage And Analyze Your FinancialsUpdate your balance sheet. If you are consistent in how and when you capture your assets and liabilities, it is easy to see your operation’s financial progression from one year to the next. The dairy strives to have an up-to-date balance sheet as of January 1, and then compares the resulting income statement against projections for the year to see how much – and why – the numbers varied. Were the deviations caused by macroeconomics, such as cheaper fuel? Or was it microeconomics at work – perhaps something management did right or wrong?

Develop cash flow projections. Calculate income minus expenses to determine whether your business will cash flow. Take the exercise a step further and use your projections for a baseline from which to develop several what-if scenarios for the coming year. If corn prices were to fall below $3.50 a bushel, could you pay your bills? This exercise allows you to develop a focused plan so you understand what adjustments might need to be made in your operation.

Review and discuss. After the partners in Homestead Creamery finish thinking through their what-ifs, the management team critiques the budget to identify potential holes. Having another set of eyes is critical to stepping back and considering additional possibilities or alternative ways of looking at potential challenges. If you don’t have a management team, turn to your outside experts, such as a lender, to review your projections. Good lenders will offer thoughtful suggestions and ideas to consider.

Commit your goals to writing. This includes business, family and personal goals in one-, three- and five-year increments. Every person involved in running your operation should be asked to complete this exercise. When each person shares his or her goals, it becomes easier to prepare for and make changes in a business.

If you can have your goals articulated, your balance sheet updated and your cash flow planned by Groundhog Day, you will be well-positioned to make sound business decisions and well-prepared for discussions with your lender in 2018.

Preparing Your Game Plan for Cash Rent Negotiations

Two years of declining farm profits and the resulting impact on farmland values is anticipated to influence the upcoming season’s cash rent negotiations. For those entering negotiations in this economic environment, preparation will be key to successful agreements. Dr. David Kohl, professor emeritus at Virginia Tech, recently spoke at our annual Side By Side conference and offered a checklist to help tenants and landlords get organized ahead of negotiations.

  • Have a game plan. Between harvest and the new year, update your balance sheet and start developing a cash flow and breakeven analysis for the next growing season. This is powerful information for tenants because it allows them ask critical questions even before negotiations begin, including: Can I afford to pay cash rent on this land? Tenants who understand their cost of production also are better positioned to have meaningful discussions with their landlords.
  • Pay attention to land practices.  Landlords need to approach their farmland as an annuity, one which needs to be well tended for their future security. It might be tempting to go with the producer who agrees to pay the highest rent. But there can be real value in rewarding a tenant who understands the importance of keeping your grandparents’ farm looking nice. More and more tenants are focused on keeping the rented ground in top condition and keeping landlords informed some now even using drones to give their landlords an overview of what is happening on the land.
  • Set and share your goals.  Separately, tenants and landlords should write their one-, three- and five-year goals. This exercise will allow each side to discuss where goals are similar and where steps might need to be taken to prepare for change. For example, the landlord might be ill and plans to sell the land in the future. This would allow the two sides to discuss whether the tenant could one day buy the land. Or the tenant might plan to take on additional land and bring a daughter or son into the operation.  This could lead to a discussion about how additional operators would affect the landlord-tenant relationship.

Today’s agricultural economy requires a keen focus on costs, including land costs. But Dr. Kohl advises not losing sight of something more enduring than the current down cycle – successful working relationships between landlord and tenant.

“Often,” Dr. Kohl said, “it’s the intangibles that are more important than the financials.”

financials

Cash-flow Budgeting: About Amount and Timing

Cash-flow budgets can be difficult to create for a farm business, but they are important to lenders for two reasons. First, lenders want to know if income from a farm will be more than the expenses. Secondly, will a producer be able to pay bills on time?

While producers generally know when bills are due and production will be ready for market, input costs and production sales prices often are entered as estimates on cash-flow budgets – and these can vary greatly. As a result, many producers update cash-flow projections quarterly or even monthly.

The steps outlined below are key to helping you and your lender understand your cash flow for the year.

Cash Inflows

Inventory any production on hand, whether it is crops in storage or market livestock. If you have a recent balance sheet, these would be in current assets. Next, estimate when and for how much you might sell that production. If you’ve already contracted part of the production, enter the quantity, delivery period and price for that portion. For any remaining production, producers often pencil in the current futures price (adjusted for their local basis) for the month in which they expect to deliver production.

Next, include line items for other income, such as government payments of any kind, crop insurance indemnity, custom work, farm rent paid to you, interest, etc. Sales of capital assets, if any, would have a line of their own. Separately, add any short-term and long-term loans you have made that will be repaid. Finally, include any non-farm income that applies to your operation.

Cash outflows

Calculate your operating costs. For crops, this includes seed, fertilizer/lime, chemicals, crop insurance, drying costs, and any custom hire or machinery rental. A case can be made that an amount should be set aside for marketing—an advisory or information service, brokerage fees, etc.

If you have livestock, include any purchased crops/feed, purchased livestock, vet and health product costs and marketing expenses.

Next, enter fixed expenses, overhead, or other expenses not allocated to a specific enterprise. Examples include real estate taxes; cash rent; hired labor; machinery repairs, upkeep, fuel and lubrication; and equipment leases.

Purchases of capital assets (total for the year) warrant a line item.

Also on the debit side is financing: accounts payable, short-term notes due, long-term loan payments and any installment contract payments.

Finally, include an estimate of taxes due and family living expenses—unless family living is financed from off-farm income. If the manager doesn’t draw a salary, a “return to management” and/or a profit target should be included, as should any planned off-farm investments.

Bottom Line

The resulting calculation of income minus expenses lets you know whether your business will cash flow. Looking at the different time periods tells you whether you need to move income into specific months to cover expenses.


AgriPoint® includes an annual cash-flow budget tool that is free to customers of Frontier Farm Credit. It does not allow entries by month, but its drop-down menus help categorize income and expenses. Kansas State University offers detailed crop and livestock budgets.