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Prepare for Round Four of the Great Margin Squeeze
As 2016 wraps up, the frustrating realization that 2017 will likely be another difficult financial year has begun to set in. After three years of falling net farm income and negative budget conditions for corn and soybean production throughout the country, 2017 is setting up to look like round four of the Great Margin Squeeze. In light of this, here are 9.3 tips to help you plan and prepare for 2017.
1. Establish profitability and cash flow goals.
The first step for preparing and planning for 2017 is creating a realistic budget and establishing profitability and cash flow goals. Setting budgets and goals are often not fun in these tight financial conditions, but it is a critical first step in preparing for 2017.
2. Determine what has to do well.
After creating your budgets and financial goals, adjust your yields, commodity prices, and cost-of-production assumptions to understand how adjustments – both higher and lower – impact the bottom line and your goals. At the end of the day, it’s important to know which factors have the greatest impact on your financial performance.
3. Seize marketing opportunities to meet your profit and cash flow goals.
While history is not guaranteed to repeat itself, it’s important to learn lessons from the past. In the summer of 2015 and 2016, grain market rallies offered you a chance to market your crops at prices near – if not above – breakeven. If you had updated cost-of-production estimates, and you established profitability and cash flow goals, you were likely in a great position to take advantage of those opportunities. As 2017 unfolds, it will be important to monitor your goals and to take action when necessary.
4. Identify and revisit the best uses of your management time and resources.
There are always a lot of things on the farm’s to-do list. There are also a lot of distractions out there. It seems like there is a new product, service, or app to help you improve the management of your farm every time you pick up a farm magazine or go to a farm show. While all these tools might be useful and helpful, it’s important to identify the best uses of your management time and resources.
It’s important to recognize which activities are best suited for your management given your operation’s needs and your skills.
For some farms, this might be time spent scouting fields. In other cases, it might be putting time into financial planning, working on equipment, or negotiating input prices.
It’s important to recognize which activities are best suited for your management given your operation’s needs and your skills. In short, are you spending your time on the things that are likely to have the biggest impact toward meeting your profit and financial goals? Make sure to stay focused on the things that matter the most.
5. Look for opportunities to free up some capital.
Keeping a close eye on cash flow and your financial position is critical in this environment. Think critically about opportunities to free up capital. Maybe there is an underutilized asset (such as farm equipment or a piece of farmland) that can be sold to generate some financial breathing room. Keep in mind, however, these might trigger tax implications.
6. Beware of the looming ARC-CO cliff.
Most grain farms signed up for the ARC-CO program, and some have been beneficiaries of large government payments. Government payments made in 2017 will be based on 2016 production, and prices will also probably be large in many areas of the country. Yes, payments are received about a year after harvest, and it’s confusing.
It is important to be aware that for the crops planted in 2017 (with payments to come in 2018), the ARC-CO payment structure is such that payments are likely to be greatly reduced from earlier years. As commodity prices have softened, so have the payment safety nets. With average or greater yields, payments will likely be very small – and maybe nonexistent.
7. Evaluate opportunities carefully. Some opportunities may be good.
While the agricultural outlook might look bleak, there will likely be opportunities that you and your operation will have to consider. In some cases, the opportunity to farm more land or to upgrade equipment might be a good opportunity to consider. Just as saying “yes” to every opportunity – at all prices – during the good times wasn’t a good strategy, saying “no” to all opportunities during the slowdown isn’t the best strategy either. Think carefully and strategically about your options. What are the top investment priorities for your business? Make a plan and focus on options that further your long-term plan.
8. Consider both the upside and the downside of the risks you’re taking.
The old glass half-full/half-empty example remains relevant today, but you may have a bias for focusing on either the upside or the downside aspects of risks. Try taking both perspectives in these tight times. When considering new opportunities – or revisiting existing operations – it’s important to make certain that ample time is spent evaluating both the upside and downside aspects of the risk. Otherwise, you’re likely to overlook the opportunities – or challenges – that might be present.
9. Focus on generating cash flow.
Make sure your cash flows are adequate. Here are three key areas to examine:
9.1 Consider opportunities to improve net cash flow. Are there enterprises that have better cash flow characteristics? Or is there one that should be expanded to improve cash flow?
9.2 Look closely at cash rents. Is there farmland you’re renting that isn’t generating enough cash flow at current rents? Can you renegotiate rents? Can you rent additional farmland to generate positive cash flow due to lower, more realistic rents?
9.3 Consider rental agreements that alter your cash flow requirements. Share rental agreements, for example, might be useful and helpful.
Wrapping It Up
Everyone knows that farming is a cyclical business. While we’d like the cycle to turn upward again, it appears that 2017 is heading toward another year of slim profit margins. Putting together a realistic budget, goals, plan, and then executing your plan will likely be critical to finding success in this economic environment.
Staying focused on your goals and managing what you can control will help you stay on the path to a successful 2017.
This article was written by Brent Gloy and David Widmar for the December issue of Successful Farming.