Farm finances in focus07/02/2019 | Soybean News, Ag Awareness, Economics
By Bethany Baratta, ISA senior writer
A low-margin environment in grain production this year means farmers should be in constant contact with their lender and be willing to adjust as necessary.
“This economic environment calls for proactive adjustments and a high focus on cash flow,” said Jim Knuth, senior vice president of Farm Credit Services of America. He spoke as part of the Iowa Farm Bureau’s economic summit in Des Moines.
Farm Credit Services is the largest ag lender in Iowa and in the upper Midwest. The company holds portfolios of 57,000 customers from all types of industries, including agriculture.
He said there’s a clear dividing line between those struggling and those succeeding this year.
“The key dividing line between those succeeding and those struggling is how they are managing their operation from a business, financial and marketing perspective,” Knuth said.
Successful grain producers are working with positive working capital and have the ability to take on short-term risks.
“They know it’s really hard to run a business without working capital,” Knuth said.
Those currently succeeding use solid financial information when making business decisions. “They don’t guess,” he said.
Flexibility has been the key in the success of grain operators, Knuth said.
“This environment is about making adjustments,” he said.
Successful operators understand the financial impacts of their business decisions. They’ve calculated the risks and rewards of purchasing new equipment with cash and taking it out of working capital versus financing a new purchase to maintain working capital.
Those farmers focus on getting better, not just getting bigger, Knuth noted.
“They maximize profit versus yield because the reality in grain production agriculture is there’s a sweet spot,” Knuth said.
By maximizing profit, those producers focus on continuous improvement. They prioritize understanding the financial part of their business.
“It’s about spending as much time in the office as you do in the field,” Knuth said.
Equity isn’t cash
A part of financial literacy is understanding that equity position — or the estimate of wealth — isn’t the same as cash flow.
“Your net worth, equity position … is not cash. It doesn’t solve cash-flow issues. It doesn’t repay loans,” Knuth said.
He said an over-reliance on net worth has led to a “lack of proactive adjustments” in the balance sheet.
“A lesson we learned in the 1980s and in the last few years is cash flow is king. Rising asset values don’t repay loans,” he said.
However, favorable interest rates are helpful in making adjustments.
Long-term interest rates have declined by 100 basis points since November 2018, Knuth said. He expects to see favorable long-term interest rates this year.
“Long-term interest rates are a gift for making cash-flow adjustments. A reamoritization strategy is for everyone,” he said.
Variable rates will likely not increase this year. Instead, one to two decreases in variable interest rates are possible, he said.
“The interest rate environment continues to be favorable for agriculture,” Knuth said.
Use this window of opportunity to adjust your balance sheet and place a larger focus on cash flow, he advises.
Most importantly, Knuth said, work with your lender.
“The worst thing you can do is run and hide from the lender. That doesn’t lead to anything positive,” he said. “Talk about the reality of where your operation is … and be willing and able to make adjustments.”
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