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Improve working capital

DANIEL LOOKER 02/05/2013 @ 9:04am Business Editor

To say that 2012 was challenging for hog producers is an understatement. As president-elect of the Illinois Pork Producers Council, Todd Dail knows that well. “If you're a hog producer and you buy feed, it was not a good year,” says Todd, who with his wife, Rebecca, runs an independent 10,000-pig farrow-to-finish business near Erie, Illinois.

The Dails farm with Todd's father, Max, who runs the crop-production side of the business. Located in the northern part of the state, in the Rock River Valley, the farm escaped the worst of the drought. Its corn yields ranged from about 133 bushels an acre to 202 bushels, with an average of 164 bushels.

“We have bottom ground and we have hill ground. The hog manure makes it all work,” he says.

When he can, Todd locks in profitable margins on the finishing hogs by using a brokerage service, Commodity and Ingredient Hedging, that tracks historical strength of margins.

So with a decent bottom line at the end of 2012, the Dails are joining other producers in building up working capital to weather even tougher times that may lie ahead.

Working capital is essentially cash, or assets that can easily be converted to cash. According to the Illinois Farm Business Farm Management Association, a ratio of working capital to value of farm production “is a measure of the amount of funds available for use if you sold all current assets and paid all current liabilities.” At the end of 2011, the median ratio for 2,511 farms in the association's study was .60, or 60% of a year's accrual revenue.

How much and where to save it?

That ratio is even more conservative than the 30% to 50% that lenders and financial advisers have targeted. The Dails' own goal is even higher.

“I would like to be more than 100%,” Todd says. “ I would like to be 150%.” He hasn't reached that number yet and his financial adviser hasn't suggested it. But it seems like a worthy goal. “The hog cycles are out there,” he says.

Having enough in reserve to pay bills and loan installments for a year or 18 months would help the Dails withstand an unprofitable downturn.

Another conundrum is where to put cash when savings accounts and certificates of deposit pay almost nothing (0.05% for a short-term standard CD at Wells Fargo at the end of 2012, for example). You can do better with online banks or interest-paying checking accounts, but checking account interest rates can quickly be reduced.

The Dails have found a slightly higher-return alternative through their lender, 1st Farm Credit Services. It offers a Funds Held Program that allows them to make advance payments, reducing interest and, in effect, getting a return of about 2%.

Todd explains how it can work, using a hypothetical example from his 10-year, $480,000 note for hog buildings. It charges the farm a fixed interest rate of 3.95%. He could put all $480,000 he owes into the Funds Held Program and, instead of paying it off, he's paid 1.95% interest. Because the loan accrues interest at 3.95%, “it's costing me 2% to park my money there,” he says. In essence, he has lowered his interest rate to about 2%.

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