January 4, 2017
9.3 Tips: Preparing for Round-Four of the Great Margin Squeeze
By David Widmar
By Brent Gloy and David Widmar.
(Brent and David originally wrote this piece for the December issue of Successful Farming, available here.)
The frustrating realization that 2017 will likely be another difficult financial year for producers has begun to set in. After three years of falling net farm income and negative budget conditions for corn and soybean production throughout the country, 2017 is setting up to look like Round Four of the Great Margin Squeeze. In light of this, we offer 9.3 tips for planning and preparing for 2017.
1) Establish profitability and cash flow goals.
The first step for preparing and planning for 2017 is creating a realistic budget and establishing profitability and cash flow goals. Setting these budget and goals are often not fun in tight financial conditions, but they are critical first-step in preparing for 2017.
2) What has to go well?
After creating your budgets and financial goals, adjust your yields, commodity prices, and cost of production assumptions to understand how adjustments – both higher and lower- impact the bottom line and your goals. At the end of the day, it’s important to know which factors have the greatest impact on your financial performance.
3) Seize marketing opportunities that meet your profit and cash flow goals.
While history is not guaranteed to repeat itself, it’s important to learn lessons from the past. In the summer of 2015 and 2016, grain market rallies offered producers a chance to market their crops at prices near – if not above- break-even. Producers with updated cost of production estimates and established profitability and cash flow goals were likely in a great position to take advantage of those opportunities. As 2017 unfolds it will be important to monitor your goals and take action when necessary.
4) Identify and revisit the best-uses of your management time and resources.
There is always a full to-do list around the farm. There are also a lot of distractions out there. It seems there is a new product, services, or app to help you improve the management of your farm every time you pick up a farm magazine or go to a farm show. While all these tools might be useful and helpful, it’s important to identify the best-uses of your management time and resources. For some farms, this might be time spent scouting fields. In other cases, it might be time financially planning, working on equipment, or negotiating input prices. At the end of the day, it’s important to recognize which activities are best suited for your management given your operations needs and your skills. In short, are you spending your time on the things that are likely to have the biggest impact toward meeting your profit and financial goals? Make sure to stay focused on the things that matter the most.
5) Are there opportunities to free-up some capital?
Keeping a close watch on cash flow and overall financial position is crucial in this environment. Think critically about opportunities to free-up capital. Maybe there is an underutilized asset – farm equipment or piece of farmland- that can be sold to generate some financial breathing room. Keep in mind, however, these might trigger tax implications.
6) Beware of Looming ARC-CO Cliff.
Most grain farms signed up for the ARC-CO program. The government payments made in 2017 will be based on 2016 production and prices and are also likely to be large in many areas of the country. Yes, it’s confusing; payments are received about a year after harvest.
It is important to beware that for the crops planted in 2017 (with payments to come in 2018), the ARC-CO payment structure is such that payments are likely to be greatly reduced from earlier years. As commodity prices have softened, so has the payment safety nets. With average – or greater- yields, payments will likely be very small, and maybe non-existent.
7) Evaluate opportunities carefully – some may be good.
While the agricultural outlook might look bleak, there will likely be opportunities that you and your operation will have to consider. In some cases, the opportunity to farm more land or upgrade equipment might be a good opportunity to consider. Just as saying “yes” to every opportunity – at all prices – during the good times wasn’t a good strategy, saying “no” to all opportunities during the slow-down isn’t the best strategy either. Think carefully and strategically about your options. What are the top investment priorities for your business? Make a plan and focus on options that further your long-term plan.
8) Consider both sides of the risks you’re taking; Upside and Downside.
The old is the “glass half-full” or “half-empty” example remains relevant today, but most of us have a bias of focusing on either the upside or the downside aspects of risks. We suggest taking both perspectives in these tight times. When considering new opportunities – or revisiting existing operations- it’s important to make certain ample time is spent evaluating both the upside and downside aspects of the risk. Otherwise you’re likely to overlook the opportunities – or challenges- that might be present.
9)Focus on generating cash flow.
Last, but certainly not least: focus on making sure that cash flows are adequate. An entire article could be devoted to this topic, but a few key points:
9.1 Opportunities to improve net cash flow should carefully be considered. Are their enterprises that have better cash flow characteristics, or should be expanded to improve cash flow?
9.2 Cash Rents: Is there farmland that you are currently renting that just isn’t generating enough cash flow at current rents? Is there an opportunity to renegotiate rents? Is there an opportunity to rent additional farmland that could generate additional, positive cash flow as a results of lower, more realistic rents?
9.3 In addition to considering lower cash rental rates, it might be valuable to consider rental agreements that alter your cash flow requirements. Share rental agreements might be useful and helpful to some producers.
Wrapping it up
Everyone knows that farming is a cyclical business. While we would like for the cycle to turn upward again, it appears that 2017 is heading toward another year of slim profit margins. Putting together a realistic budget, goals, plan, and executing your plan will likely be critical to finding success in this economic environment. Staying focused on your goals and managing what you can control will likely put you on a path to a successful 2017.
Photo Source: Flickr/Conal Gallagher. “Barn”