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Farm margins: Focus on what you can control

Agriculture.com Staff 12/17/2007 @ 1:19pm

For a lot of grain farmers, 2007 has been a pretty good year. But, before you drop those extra dollars on new iron or that long-desired vacation to the tropics, make sure you've got all your financial bases covered on the farm.

It's easy to let euphoria take control in times of high prices and bountiful crops. But even in times like this, it's important to make sure all expenses are covered -- especially with the marketplace as volatile as it is today, according to Iowa State University Extension farm management specialist James Jensen.

"In the short run, margins are getting larger and crop farmers have more cash. It will take a little time for everyone involved to adjust to the large changes that we have recently been experiencing in agriculture, but eventually the margin will return to a more normal level," Jensen says. "The problem is that if the general price level remains higher, the risk to the farm producer is also much higher."

With this new risk level added into the equation, it's important to act on issues that can be controlled, not those that "are beyond the individual farmer's control," Jensen adds. This starts with the handling of excess cash generated by both high market prices and yields.

"Many react by spending the increased money in a manor that will reduce their tax liability the most. Although tax planning is important, it should not drive the use of excess cash," Jensen says. "It obviously is a good time to update machinery purchases that have been deferred during leaner years, however care should be taken not to encumber future farm production cost with increased debt financed purchases.

"Tax deductions help with present income downsizing but often prove troublesome in later years when the tax breaks have been used up and the debt still remains. Size equipment property for the operation and use as much cash as possible for the purchase," he adds.

And, don't be too tantalized by a sky-high marketplace. High prices are great, but don't sell into the market without first making sure doing so will cover all your expenses, Jensen says. Some expenses, like land rents, are increasing as much as or more than profits, so pay attention to the expense side of the balance sheet first.

"Make sure that product selling prices are locked in to allow for rental payments that still leave a profit margin for the producer. Flexible leases may help share the risk and may result in a more long term relationship with owners while reducing the need for yearly negotiations," Jensen says. "A similar philosophy can be applied to land purchases based on the operations cash flow ability to make the payments."

For a lot of grain farmers, 2007 has been a pretty good year. But, before you drop those extra dollars on new iron or that long-desired vacation to the tropics, make sure you've got all your financial bases covered on the farm.

The heightened risk that comes with higher-value production, Jensen says, can be assuaged by adhering to a marketing plan and utilizing all risk management tools at your disposal. Don't stray from historical management decisions only in the name of capitalizing on higher market conditions, he adds. Wider margins don't always mean there's room for disproportionate profits.

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