OPPORTUNITIES IN AGRICULTURE With Improved Prices

WRITTEN BY 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.

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.

Consider completing a cost-benefit analysis on pieces of machinery that have required more repair expense in recent years. In addition, look at opportunities to sell farm machinery or assets that are no longer needed to help fund the capital purchases your farm needs. Each farm’s situation is different, and managers will need to consider what makes sense for them. For some, no capital expenditures are needed at this time. Instead, restoring working capital or reducing debt might be the better option.

Commodity price changes can have rippling effects throughout agriculture. The recent increase in corn and soybean prices may impact cashflow, land values, planting intentions, land rent and so forth. History shows us another implication of better commodity prices coming in the form of higher production costs. Slight increases in seed, fertilizer and fuel in 2021 are likely. Over the last several years, farm operations have gotten better at reducing costs by shopping around and obtaining prices from multiple suppliers. It is just as important when times are good to avoid bad habits and thoroughly examine your input costs to protect your potential profit. At the same time, it is important to cautiously make reductions in production costs so as not to significantly impact yield potential and those top profitable bushels.

“Slight increases in seed, fertilizer and fuel in 2021 are likely.”

In terms of land rent, be cautious about paying excessive cash rental rates that may not be profitable. Consider negotiating flexible lease options with agreeable landlords, which may set a practicable base rental rate with an opportunity for a higher final rental rate should crop prices or yields increase. Land values themselves should hold value or rise with increased prices. Some operations looking to purchase real estate may be positioned to pay more than others due to different overall financial positions. Managers will need to carefully examine each land opportunity individually, shop around to find equivalent land sales in terms of quality, compare the costs of owning rather than renting and observe how a new long-term payment will impact cash flow for years to come.

“One could state there has never been a better time to restructure debt to take advantage of low interest rates.”

So, what does the 2021 outlook with higher prices have to do with credit? As farms look to take advantage of higher prices, and possibly adding acres or making changes within their operation, debt structure comes into play. One could state there has never been a better time to restructure debt to take advantage of low interest rates. A debt restructure could be done to restore liquidity, buy capital, etc. When examining your financial position, it is important both your balance sheet and cash flow are in check to establish and maintain a healthy overall financial position. A properly structured farm operation will be able to take advantage of opportunities that present themselves throughout the year.

I’m happy to report that there is once again optimism in agriculture. A sense of excitement moving into the 2021 crop cycle can be felt by talking with different farmers. With that said, each operation is positioned differently. Every farmer and rancher would be wise to manage their farm accordingly in order to set the table for greater future success.