Don’t Call Me An Expert - This is just the way I do things

Planning Crop Strategies and Cash Flow

By Ron Anderson

Each year after the harvest and hunting season are distant memories, I start planning for the new crop year by doing  a couple of financial tasks. The first is to determine my income tax liability, and then do a projected cash flow for the next crop year. If I had my choice, I would rather be digging mud out of a plugged beet lifter in the middle of the night. Sitting down and calculating expenses for crop inputs is time consuming and not much fun, especially with the new scenario of high energy and fertilizer costs. On the other hand, in years when prices look better and yield history is good, it can be enjoyable to calculate how much money you expect to make.

Because income tax is part of the next year’s budget, I see my accountant in mid December to begin the process of next year’s cash flow. I use Quicken to keep track of every cent that goes through my check book and it works very well for me. My income and expense are printed out on one easy-to-read page. For more detail on some categories I print reports that help my accountant understand things like capital purchases, dividend income and farm program payments. This tax planning session is usually done in one meeting that takes about an hour.

Next I begin to pencil out a cash flow for the new year. I start by looking at a map of all my land on a single piece of paper. I think of the crops that were on each piece last year and begin to imagine what would be best to plant next year considering weeds, drainage, and rotation restrictions. After penciling in what crops go where, I add up the acreage to determine the totals of each crop.

My crop mix is normally determined by the above agronomic factors, however this 2006 crop mix has a new element that will unfortunately drive my decisions of crop selection and acres. High fertilizer prices have all of us wondering what can be planted that will reduce this input which is needed yet makes profitability nearly impossible.

There are two things that I will consider doing. One would be to plant more soybeans that, depending on soil tests, need little or no nitrogen. The other would be to simply cut back on fertilizer rates on wheat acres. I don’t like to cut back on nitrogen on wheat because if we get good growing conditions, the yield potential could be limited. Another option would be to fertilize for my actual proven yield rather than the big bin buster that we rarely get.  Each 10 units of nitrogen will cost $4.00 or more per acre this spring. I may be planting 500 to 700 additional acres of soybeans which is not what I want to do but what I may have to do to make the numbers work.

I recall my early years on the farm when my dad would make his crop plan by simple percentages: 50% wheat, 25% barley and 25% summer fallow.  And it’s interesting to think back a few years when my dad was paying $1.00 per gallon for diesel fuel, $12 per acre for NH3 and a whopping $28 cash rent. At prices the same (or better) than they are now – gosh, how did they do it???

I don’t recall my dad spending hours on expense calculations and running spread sheets to determine profitability. However, this planning is essential for me to secure a line of credit each year. It’s true what they say, “you can impress your banker with a lot of numbers.” 

After I have come up with a crop plan, I work on projected expenses of the main input items like seed, chemical, and fertilizer. I try to get very accurate on these items even though some prices are not available yet. Some fertilizer has already been applied, so those per acre costs can be determined by those invoices. Most of my seed has also been ordered so those costs are easily determined. Other items like fuel, repairs and labor I use my Quicken report from the past year and make adjustments as necessary.

A few years ago, my banker designed a spread sheet using Microsoft Excel that I use to put all of this data together. This allows me to change one expense item and it will automatically recalculate my bottom line. Other items like land and family living expenses are also included. On one page I eventually have a business plan for the following year.

Crop prices for the following year are somewhat set by the lending community, and are usually on the conservative side. This is another thing I like about this spread sheet. Changing prices can quickly show how the bottom line changes. I like things simple and short and this spread sheet works well for me. I then can bring this to the bank and decide what changes if any I need to secure my line of credit.

Although a well thought-out business plan is one thing, it’s another to follow it and stay within several budgeted categories. I used to put this budget on my Quicken and then from time to time compare how I am doing. I stopped doing this because as soon as one category was exceeded I would begin to worry. I have been assured by my banker that this planning process is only a plan and if it is done reasonably, Mother Nature and markets will be the only variables we can’t control. I guess that sums up the something we already know.

Perhaps the reason I have gotten into the routine of cash flows, budgets, and balance sheets is my past enrollment in the MN Farm Business Management program. This program is very helpful in preparing records and looking at how my operation compares to others.

It really does help communicate with both the accountant and the banker when you come in prepared. I think if you are well prepared in record keeping and planning, it helps them understand your business better. I know it helps them help me better. Not all of this planning can be done alone at home. I usually make several trips to talk with my lender as he double checks loan balances and payment dates.  

After completing this plan, I can relax for a couple of months before I start actually buying inputs and repairing equipment. My banker knows I have a workable plan and I know I can meet all my obligations. I think everyone’s need for business planning is different depending on their financial situation. I can’t imagine not going through this regimen each year, no matter how financially fit I am.  And I imagine I’ll continue doing it until I no longer look forward to getting out there in the spring, with that fresh scent of dirt and diesel in the air.