Projected profit margins for crop production in 2021 are expected to improve significantly for many growers compared to previous years. The harvest income of many growers should increase in the coming year. However, it seems that the cost of some crop inputs such as seeds, fertilizer, and fuel are also likely to increase slightly in 2021.
Raw material prices and gross income per acre for corn and soybean production rose significantly at the end of the 2020 crop year. This trend is likely to continue through 2021.
Profit margins in the livestock sector have also improved somewhat in late 2020 but will remain quite tight until 2021. Agricultural credit availability should remain good for farms with a solid financial base. However, lending could remain a little tight for farms at higher risk.
The financial volatility in agriculture is still quite high today. Below are some financial strategies that farms should consider during these very volatile times on the farm:
Keep the current position segment (cash available) of the farm business strong.
- Pay attention to the amount of working capital and the current quota in your company accounts. In times of improved profit margins, this is probably a good time to rebuild working capital on a farm that may have been depleted in recent years.
- Typically, using excess cash from the farm to pay down short-term operating debt is a better option than making additional payments on term loans.
- If there is excessive crop receipts from grain sales in 2020 beyond repaying the 2020 Farm Operating Loan, it is likely best to prepay around 2021 crop yields.
- When analyzing working capital for the farm, remember to consider CCC grain loans, supplier financing of crop input, family member short term loans, etc.
Look for ways to manage production costs and other expenses.
- Try to be an optimal producer of costs. Thoroughly analyze the cost decisions for seeds, fertilizers, chemicals, etc. for plant production 2021 and look for ways to manage these input costs.
- Use caution when lowering production costs so as not to materially detract from potential earnings. Optimizing crop yields is important to the bottom line of agricultural profits.
- Be careful about paying excessive cash rental rates for rented land and ensure that the rental rates remain profitable. Also, try to negotiate reasonable rental rates with existing landlords.
- Negotiate flexible leases with acceptable landlords who set a manageable base rental rate, with the option of a higher final rental rate as final crop prices and / or yields increase.
- Review other direct and overhead costs on the farm and look for adjustments.
Review other ways to manage financial risk.
- Optimize the farm’s grain marketing plan based on regularly updated production costs, which include price targets and deadlines set as part of the marketing plan.
- Don’t get caught up in the hype or gossip. Notice how changes in corn and soybean market prices affect your own farming business. Don’t miss out on the opportunities to win.
- Look for positive profit margins in livestock production and take advantage of securing both cash spend and market prices when those margins are in place.
- Take the time to analyze the best options for the farm program and crop insurance strategies for your farm operation. These decisions can be key to a solid risk management strategy.
- Excessive family and non-farm expenses can be hidden expenses on the farm. Include non-farm income and expenses, as well as other family living expenses, when planning farm cash flow.
Pay attention to that
Repayability for Term Debt Loans.
- In addition to the decline in working capital, a low debt coverage ratio is a key metric for analyzing the financial strength of a farm. This ratio is the cash available to pay back debts divided by the total principal and the interest that is due on all medium and long-term loans.
- Make wise decisions about how to use the cash available for farm machinery investments and capital improvements, and ensure that the investments are needed to run the farm.
- Term loans set up to fund machine purchases and capital improvements may require payments for multiple years that need to be factored into cash flow budgets for 2021 and beyond.
- Look for ways to sell farm assets that are no longer needed on the farm and use funds to buy capital, additional working capital, or to repay some temporary debt.
Carefully analyze farmland buying decisions.
- There will likely be plenty of farmland for sale in the coming year, and some farm owners will likely have extra cash on hand. Be careful not to get caught up in the “buy now they are no more farmland” hype. Make sure that all land purchases are financially sound for the long term future of the farm.
- Before making the decision to purchase high dollar farmland, browse around as there may be opportunities to find comparable farmland in terms of land quality and production capacity for less money.
- Compare the cost of owning the farmland to the estimated annual land rental prices over the next few years to ensure more arable land.
- Compare the cost and potential return on investing money to acquire additional farmland versus investing money and the return on improving existing farmland through improved drainage, etc.
- Make sure you include the required annual principal and interest payments on home loans, as well as property taxes, in your future annual cash flow forecast for the farming business.
Communicate with family members, farm partners, and lenders.
- When financial affairs and farm profitability improve on the farm, as in the current situation, it is easy to revert to bad management habits. It is still very important to discuss and adequately analyze farm financial strategies with family members, partners, lenders and other advisors on the farm.
- Meet with your Ag lender early to discuss your farm loan needs for 2021 and to consider possible capital or real estate purchases and adjustments for the coming year.
- Use business management consultants, crop insurance agents, marketing and crop consultants, and other professionals to help make management decisions. See your lender and other professionals as advisors to assist you with key financial and business management strategies on the farm.
- Before finalizing these decisions, discuss planned machine and equipment purchases and potential land purchases, as well as the projected cash flow impact on the farming business.
- Discuss grain and livestock marketing plans and analyze the impact marketing decisions could have on cash flow projections.
- Discuss financial concerns early, either related to farms or non-farms, while there is still time to make the necessary financial adjustments.
Kent Thiesse, Farm Management Analyst and Senior Vice President of MinnStar Bank in Lake Crystal, Minnesota, can be reached at (507) 381-7960 or [email protected].