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You have heard the saying “Be careful what you wish for, you just might get it.” What initially seems like an answered prayer ends up being a curse instead. Perhaps it is a story of a lottery winner who goes broke after just
a few years. How often have you prayed for rain, only to end up with a flood? And in our case, $10 wheat, $14 soybeans and $8 corn look like answered prayers, but what will they look like in the long run to our
farm? It looks like an answered prayer today, but what will it look like in five, ten or even twenty years?
As I work with farmers on their farm finances, and their marketing plans, I am pleased to see that most of
them are preparing for a setback in the farm economy. According to the USDA Economic Research Service, from 2010 to 2011, they are projecting a sixteen percent increase in crop and livestock sales, and a twelve
percent increase in total production expenses. So far, gains in sales are exceeding gains in production expenses, but farmers are well aware that both the income and expense categories are creeping higher. There
will be a year, or years, when gains in production expenses exceed gains in income.
Many farmers are making long term decisions, such as land purchases, new shops, or machinery or grain
storage.
Does the long term outlook for agriculture support those long term purchases? Will you still be able to make your shop payment in three years? That is something only time will tell, but here are a few recommendations to help prepare your farm for a potential downturn in the ag economy.
First of all, keep some cash. The rule of thumb is that working capital should be thirty percent of
gross cash farm income. If your farm grosses $100,000, you should have $30,000 of working capital. With interest rates at rock bottom levels, it may be better to finance a purchase instead of spending down your cash
reserves. Cash gives you flexibility when you need to make quick decisions, or if you have a bad year, especially when you can finance a purchase at relatively low rates. If your working capital starts to exceed
thirty percent, use that cash to make purchases, but maintain a comfortable level of cash on hand.
Secondly, make commodity sales when you make input purchases. If you are buying your seed, fertilizer, and
locking in land rental rates, you should be able to sell your commodity at a profit. The same might not be true in six months, or maybe even a year. Many farmers make input purchases twelve to eighteen months ahead
of the cash sale, and that is a long time to wait for the market to move. We have seen how much prices can change in a year, for the better and worse. As you make short term purchasing decisions, make sure to make
sales decisions as well.
Try a long term cash flow projection, using more modest prices. Is your farm still profitably if cash
soybean prices are in the single digits?
Or wheat prices creep back towards six dollars instead of eight? If you are a high-debt farm, what happens if interest rates rise two percent? Is your farm protected from the risk of higher interest rates and lower commodity prices? The farm can certainly survive good times, but can it survive a hiccup? A longer term cash flow plan, maybe five years out, can help answer those questions.
Finally, be proactive with your marketing plan, and not reactive. Price targets are miracles. I sure wish I
would have sold more soybeans at fourteen dollar futures, and more wheat over ten dollars, but I am at least thankful I sold something. It was the miracle of price targets that kept me level headed when the bulls
were running wild. Utilize some put or call options to help make your decisions less stressful.
Saint Theresa said “More tears are shed over answered prayers than unanswered ones.” You have prayed for
higher prices, and you have them. Now we need to make sure that higher grain prices remain the answer to our prayers.
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