Focus on Ag: Financial management strategies for 2022
Projected crop production profit margins for many producers in 2022 are likely to be much tighter as compared to 2021 margins.
Crop revenues for many producers will likely continue to be quite strong in the coming year. However, expenses for crop inputs, such as fertilizer, chemicals, fuel, repairs and labor are likely to increase substantially in 2022. Commodity prices and gross revenue per acre for corn and soybean production increased considerably during the 2021 crop year, which is a trend that is likely to continue this year.
The profit margins in the livestock sector also improved in 2021 but are also likely to narrow in 2022 due to increased production costs.
Credit availability for agriculture should remain good for farm businesses that are on a solid financial base. However, both short-term and long-term interest rates are likely to begin rising during 2022.
Financial volatility remains quite high in farming today. Following are some financial strategies for farm businesses to consider during these highly volatile times in the farming business:
Keep the 'current position' (cash available) segment of the farm business strong
• Pay attention to the level of working capital and the current ratio on your farm financial statement. During these times of improved profit margins is probably a good time to re-build working capital in a farm business that may have been depleted in recent years.
• It is usually a better option to use excess cash revenues from the farm operation to pay down short-term farm operating debt, rather than to make significant extra payment on term loans.
• If there are any excess crop revenues from 2021 grain sales beyond repayment of the 2021 farm operating loan, it is probably best to prepay some 2022 or 2023 crop expenses.
• Remember to account for CCC grain loans, financing with crop input suppliers, short-term loans from family members, etc. when analyzing the working capital for the farm operation.
Look at ways to manage production costs and other expenses
• Try to be a “optimum-cost” producer … thoroughly analyze seed, fertilizer, chemical, etc. crop expense decisions for 2022 crop production and look for ways to manage those input costs.
• Be cautious when making reductions in crop production costs, so not to significantly impact yield potential … optimizing crop yields is still very important to the bottom line for farm profits.
• Be cautious about paying excessive cash rental rates on rented land and make sure that rental rates are still profitable. Also try to negotiate reasonable rental rates with existing landlords.
• Negotiate flexible lease contracts with agreeable landlords that sets a manageable base rental rate, with the opportunity for a bonus rental payment if final crop prices and/or yields increase.
• Review other direct and overhead expenses in the farm operation and look for any adjustments.
Review other ways to manage financial risk
• Fine-tune the farm’s grain marketing plan, based on the cost of production that is updated regularly, which includes set price targets and deadline dates as part of the marketing plan.
• Don’t get caught up in the market hype or chatter … pay attention to how changes in the corn and soybean market prices affect your own farm business. Don’t miss the profit opportunities.
• Look for positive profit margin opportunities in livestock production and take advantage to “lock-in” both cash expenses and market prices when those margins exist.
• Take time to analyze the best farm program options and crop insurance strategies for your farm operation … these decisions can be a key to having a sound risk management strategy.
• Excessive spending for family living and non-farm expenditures can be a hidden expense in the farm business. Include the non-farm expenses and other family living expenditures that are reliant on farm income in the farm cash flow planning process.
Pay attention to the repayment ability on term debt loans
• In addition to declining working capital, a low term debt coverage ratio is a key ratio in analyzing the financial strength of a farm business. This ratio is the cash available for debt repayment divided by the total principal and interest due on all intermediate and long-term loans.
• Make wise decisions on the use of available cash for farm machinery and capital improvement investments, and make sure that the investments are needed for the farm operation.
• Term loans that are set up to finance machinery purchases and capital improvements may require payments for several years, which need to be factored into cash flow budgets for 2022 and beyond.
• Look for opportunities to sell any farm assets that are no longer needed in the farm business and use funds for capital purchases, added working capital, or to repay some term debt.
Carefully analyze decisions to purchase farm land
• There is likely to be a lot of farm land for sale in the coming year and some farm operators are likely to have some extra cash available. Be cautious not to get caught up in the hype of: “Buy now, because they don’t make any more farm land”. Make sure that any land purchases are financially sound for the long-term future of the farm business.
• Shop around before settling on a high dollar purchase of farm land, as there may be opportunities to find comparable farm land, as far as land quality and production capability, for less money.
• Compare the cost of owning the farm land to the likely annual land rental rates over the next few years to secure increased crop acreage.
• Compare the cost and potential return of the cash investment to purchase additional farm land to the cash investment and return of improving existing farm land with upgraded drainage, etc.
• Be sure to include the required annual real estate loan principal and interest payments, along with real estate taxes, into future annual cash flow planning for the farm business.
• In addition, do a "stress test” on the real estate purchases to make that those real estate loan payments still have a positive cash flow with a 10% decline in net farm income.
Communicate with family members, farm partners, and ag lenders
• When financial matters and farm profitability in the farm operation improve, such as in the current situation, it is easy to revert back to bad management habits. It is still very important to discuss and properly analyze farm financial strategies with family members, partners, ag lenders, and other consultants in the farm operation.
• Meet with your ag lender early to discuss your farm operating credit needs for 2022, and to consider possible capital or real estate purchases and adjustments for the coming year.
• Use farm business management advisors, crop insurance agents, marketing and crop consultants, and other professionals to assist with farm management decisions. View your ag lender and other professionals as consultants to assist with key financial and business management strategies in the farm operation.
• Discuss planned machinery and equipment purchases and potential land purchases, as well as the projected cash flow impacts on the farm business, prior to finalizing those decisions.
• Discuss grain and livestock marketing plans and analyze the impact that marketing decisions could have on cash flow projections.
• Discuss any financial concerns early, either farm-related or non-farm concerns, while there is still time to make any needed financial adjustments.
For additional information contact Kent Thiesse, farm management analyst and senior vice president, MinnStar Bank, Lake Crystal, Minn., at 507-381-7960 or firstname.lastname@example.org.