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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.


How to Decide Right Time for Farmland Purchase

While sales activity continued to slow in the first quarter of 2015, farmland remains in fairly solid demand. Interest rates still are attractive and land in many areas across the corn belt is generally cheaper than a year ago, when prices in several areas hit all-time highs.  Some who are bullish on agriculture long-term consider this a good time to expand their operations for a future in which they foresee more consolidation and greater efficiencies in the industry.

For those weighing a land purchase, the decision starts with a realistic cash flow. Whether times are good or bad, cash flow is key to determining if you can afford to buy farmland. In today’s environment of lower commodity prices, potential buyers need to ask: How much room do I have to take on land that is unlikely to cash flow in the current grain cycle? At today’s grain and input prices, borrowers likely will need the rest of their operation to subsidize the land purchase.

The balance sheet is the next factor. Producers who plan to put cash into a land purchase – and many of today’s buyers are doing just that – need to take a hard look at what this does to working capital. Does the remaining working capital provide enough cushion if cash-flow problems develop?

Finally, potential buyers will want to consider their balance sheet equity. A producer might have low enough costs to make land bought at today’s prices cash flow. But if cash flow is tight and working capital is weak, the risk could prove too great. Ask yourself: If I leverage up my balance sheet and I have a bad year, will I still be able to get financing to keep my operation going? Will I be able to invest in a new tractor if my current one breaks down?