OPPORTUNITIES IN AGRICULTURE
With Improved Prices W R I T T E N B Y Brendon Foss, VP Loan Officer
Commodity prices and gross revenue per acre for corn and soybean operations increased considerably late in 2020 and into 2021. The increase has restored optimism in the country. Projected profit margins have vastly improved compared to recent years in crop production. Projected profit margins in the livestock sector also saw some improvement late in 2020, but cash flows remain rather tight heading into 2021. We know that as fast as prices can improve, they can also disappear. Leveraging crop revenue insurance to take advantage of today’s prices is one path to lock in prices above break-even levels. Written marketing plans will need to be created, updated, and executed in the volatile markets we face in agriculture.
While 2021 projections look better than recent years, 2020 appears to have been a profitable year for many farm operations thanks in large part due to government payments and generally good yields. For some, the profits were just enough to cover their principal and interest payments on their debt. For others, working capital was rebuilt after being depleted due to tighter cash flows since 2013. Today’s commodity prices present an opportunity to rebuild liquidity, provided a crop is successfully grown and marketed.
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Why, you may ask, is working capital so important? The cash position of your farm is key for a variety of reasons. First, liquidity acts as a safety net to absorb losses should adversity strike. Second, liquidity gives your farm negotiation power on capital investments, such as land, machinery or equipment. This negotiation power, in terms of quick access to funds and the ability to selffinance, can allow you to jump on opportunities as they arise. Lastly, generally speaking, liquidity allows you to be less reliant on your lender and offers you flexibility to manage your farm. Those farms with an increased cash position may feel the need to reduce debt in some cases. When deciding whether to pay ahead on term loans, each farm will need to consider if their working capital is strong enough for them to do so. It is typically better to apply extra proceeds/cash to short-term operating debt first, in order to maintain of build liquidity for the long haul.
Capital spending has been largely reduced over the last several years as farmers tried to cut costs and capital expenditures while prices were depressed. For some, it may be a good time to update farm machinery or make capital improvement investments. Before you go out and make a purchase, examine your current equipment and put together a multi-year capital spending plan to manage your line of machinery.
