Taming The Bulls & Bears

by Betsy Jensen, Ag Commodity Instructor, Northland Community & Technical College, betsy.jensen@northlandcollege.edu

The Happiest Place on Earth

A recent trip to the “Happiest Place on Earth” has revealed to me that I am not the happiest person on earth. Instead of enjoying a giant mouse waving frantically at me, I thought about how hot that costume must be. Instead of enjoying singers and dancers during a parade, I thought about how uncomfortable those shoes must be. And how much do those fireworks cost every night? I am happy with fireworks once a year on the Fourth of July. Fireworks every day is just too much happiness. I am too practical to enjoy being happy.

Maybe this explains my paranoia with the farm economy. Instead of enjoying some of the most profitable years in farming, I am living in fear of what will be around the next corner. I have accepted that I never received $20 wheat, and I do not expect to ever receive $20 for wheat ever again (if wheat was $20 the protein discounts would probably be $3 per fifth down and I would end up with $5 wheat anyway). Can I learn to survive without the potential of $20 wheat? I look at numbers from dairy farmers and I am well aware that some areas of agriculture have already turned the corner from profitability to red ink. Their $20 milk is long gone.

This winter Dr. David Kohl, Professor Emeritus of Agricultural Finance and Small Business Management at Virginia Tech, gave a series of five seminars for Minnesota farm management students. During those sessions, he repeated several times that 25% of bankruptcies occur after a business’s most profitable year. When you are flush with cash, it is easier to make bad decisions. You lull yourself into believing that the profits you have experienced over the past few years will continue forever.

I am trying to focus my skepticism and practicality on looking to the future. How can I make sure I am not one of the 25% of businesses who go bankrupt? My first agenda item may surprise you, but I am going to stop planning so far ahead. I know that sounds ridiculous from a farm management instructor who emphasizes business plans, but hear me out. We have the ability to sell 2010 corn, soybeans and wheat, but I do not think that is a good idea.

Can you tell me what I will be paying for fertilizer for 2010? Or fuel? Or land rent? Or even interest rates? The only bright spot in this roller coaster economy is that everything is moving together. When wheat prices peaked, so did fuel and fertilizer. Although that relationship is not guaranteed to last, I do not want to make a “double mistake” by selling the output at a low, and buying an input at the high. You could get lucky and make a “double profit” by selling high and buying low, but is it worth the risk? We do not know our cost of production for 2010, and it could change dramatically in the next few months. I am still going to forward contract, but I will do so when I have a better handle on what my cost of production will be. A small sale just to get your feet in the water is still a possibility, but the majority of the production should be sold once you have confidence in your cost of production calculation.

I am also hoarding cash. The Farm Financial Standards Council added a new ratio this year called “Working Capital to Gross Revenue” and farm management is recommending 30% of gross revenue as cash. If your farm grosses $100,000, you should have $30,000 cash on hand. No farmer ever likes debt, and although it is tempting to pay down loans, I am hoarding the cash instead. Interest rates are at rock bottom levels and having cash gives you flexibility to react quickly to opportunities. If neighboring land comes up for sale, or if the tractor you need is at an auction sale, cash gives you flexibility to react. If you have the opportunity to pre-pay inputs this summer, it would be nice to have the cash on hand instead of heading to the bank first, and risk hearing no. When times are tight, there is no substitute for cash.

My final plan is a sensitivity analysis. Our Finpack software started including a sensitivity analysis in our cash flows for 2009, and it has been humbling. Our cash flows now tell us what happens if prices fall, expenses increase, or interest rates rise. We need to be prepared for those potential risks. I joke with farmers that budgets are made to be broken, because they always are. But what are the repercussions of breaking the budget? A sensitivity analysis gives you an indication of the potential risk in your decisions. Can you still cash flow if prices drop 10 percent? If the answer is no, you had better price some crop today when the price does cash flow.

Nineteen senators have written a letter to Agricultural Secretary Tom Vilsack and Treasury Secretary Tim Geitner asking that banks who received government money provide refinancing options for farmer debt, similar to what they are doing for home mortgages. The letter mentions a 40 percent drop in wholesale dairy prices and 16-25 percent drops in other agricultural commodities. Apparently I am not the only one who is nervous about what lies around the corner. Think of the letter as preventative medicine instead of emergency medicine.

I think by now we are all well aware that past results are not indicative of future profits. It is time to put on the battle gear and head out on the field again. This time with a battle plan that includes cash, sensitivity analysis and an accurate cost of production. I might not be happy enough to spend an entire week at the Magic Kingdom, but I will certainly be happy if I can survive the next few years.