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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this year’s slow, wet spring has changed prospects for 2019, and your initial profitability projections likely are outdated.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.”

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.