2011 financial risk strategies
With harvest wrapping up, farmers need to consider where they stand currently with their own financial situation.
Grain sales to meet fall and winter cash flow needs should be paramount. A rule of thumb is for a farm operation to maintain working capital (current assets minus current liabilities) of $200 to $300 per tillable acre. While interest rates remain relatively low, a farm’s ability to manage financial risk is critical. Consider generating enough from old crop sales to meet debt service and prepaying 2011 input costs.
A rally of nearly $2.50 per bushel for corn and over $3 per bushel for soybeans from their 2010 summer lows will likely increase the sense of loss from earlier sales. While the emotional loss for those bushels previously priced will be high, I encourage farmers to be realistic with prices for their remaining risk bushels and allow cash flow needs rather than emotion drive additional sales. Cost of storage and interest costs should be considered along with futures market carry and potential narrowing of basis. High futures market prices will eventually ration a smaller 2010 crop and reduce demand. The livestock and ethanol industries will face much higher operating costs and breakevens as the result of these corn and soybean prices.
2010 Crop Insurance and SURE Coverage
Nearly 85% of all Iowa’s insured row crop acres are covered by revenue crop insurance products. The high October futures prices for both December corn and November soybean futures contracts increase the potential indemnity payments that many farms will receive should they have large yield loss. Work with your crop insurance representative and keep good records on each field that can be reported for Actual Production History (APH) purposes. Government farm programs such as the Supplemental Revenue (SURE) uses crop insurance losses across entire farms and will require good 2010 records.
Expect Higher 2011 Input Costs
The financial and market price risk of row crop farming has increased substantially since the 2008 crop year. The result will be those record 2008 futures prices to forecast potential 2010 crop futures prices. However, higher prices will also trigger much higher input prices; especially fertilizer, fuel and perhaps seed. Producers will want to maintain adequate working capital (current assets minus current liabilities) to help cover operating costs and debt servicing. Many of 2011 crop costs are already being incurred with fall tillage, fall applied fertilizer and early seed discounts. Most row crop farms have 2010 operating costs borrowed and are now making 2011 input decisions. Early discounts for the purchase of fuel, fertilizer and seed will likely mean the need for prepaying with cash. This also means increasing counter-party risk as many producers are unsecured creditors to the input suppliers that they are pay in advance. Keep good records that specify the particular purchase made and start early on 2010 income tax planning.