Kansas farmers have seen a decrease in commodity prices throughout the start of the 2016 calendar year. In terms of planted acres this spring and weather throughout the growing season, it is likely going to be another year of tight operating margins and declining crop farm revenue from the peaks, just a few years ago. Successfully navigating an era of tight margins requires a renewed focus on key strategies pertaining to the management of financial stress.
One of the keys to long-run success in a commodity business is to be a low-cost producer. With declining prices for most crops and livestock, maintaining low costs per bushel and costs per pound will be essential. However, this is often easier said than done, because most producers already believe they are operating at the lowest possible cost. Rather than focusing our attention on managing the cost side of the business, often our focus in agriculture is on increasing volume or revenue. The strategies discussed below represent some items for you to think about in the short- and long-term as you manage the financial risks faced by your business, according to ag economists with the Kansas Farm Management Association.
Working capital is the difference between current assets and current liabilities. During the last few years, many crop farms drew down their working capital to purchase assets including machinery, buildings and land. Now that margins have tightened, a more cautious approach should be taken to purchase capital items; machinery and equipment purchases should be postponed if possible.
Now is the time to talk to your lender about restructuring your debt. A typical adjustment to reduce cash flow pressures is to negotiate longer repayment terms. Many land purchases during the last decade were made with relatively short-term debt. With strong farm incomes, that is not a problem, but tighter operating margins will put a strain on cash flow and make the farm less resilient to financial stress. Longer terms often will reduce cash flow pressures, but remember the debt still must be serviced, and this strategy does nothing to reduce cost or increase income. In addition to extending loan terms, it might be a good time to move any remaining variable rate loans to fixed rate loans in order to reduce the risk of any future increases in the interest rate.
Underutilized assets are particularly costly during times of financial stress. Do you have assets such as storage facilities or livestock buildings that could be rented out? Sharing equipment with another farmer or leasing rather than buying also can be opportunities to effectively increase your asset turnover.
Farmers have done an excellent job of controlling costs during the last few years, but we still see large differences in costs among farms. Any long-term strategy with the potential to reduce crop or livestock production costs should be considered. Rents are one of the largest cost items for crop producers and have some flexibility because they often are negotiated on an annual basis. Rents for this year are likely set; however, as you are setting rents for the future, you might want to have an honest discussion with your landlords and look for ways to more effectively share risk. It also might be possible to join together with other producers to buy inputs in larger volume at lower prices.
As you evaluate and compare the key strategies discussed here, remember it will be next to impossible to do so without up-to-date financial statements and a marketing plan. It also is critical to have open lines of communication with any lenders and landlords you work with to mitigate issues related to financial stress before they become severe.
• Information provided by Elizabeth Yeager, K-State agricultural economics.
Stacy Campbell is the Kansas State Research and Extension agent for Ellis County.