Editor's Note: Steve Johnson is the Iowa State University Extension farm management specialist for central Iowa. You can contact him at sdjohns.iastate.edu or by phone 515-957-5790.
While production risks are at the forefront of most producers' minds this spring and summer, don't ignore the need to manage your farm's overall financial risks. While the initial concern may be trying to market crops at low cash prices not seen since 2009, part of the solution is looking beyond the next six months.
Despite the tight profit margins expected for 2015, consider these five financial risk management strategies.
1) Protect your working capital. Maintain adequate cash reserves, which are typically working capital (current assets minus current liabilities) as well as operating lines of credit. By the late summer months, these reserves and access to credit will be critical to finish off 2015 crop operating expenses and make early input decisions for the 2016 crop. Many operations reduced their available working capital the past year and may not have maintained adequate cash reserves for what are needed in the face of falling crop prices.
The goal of most Corn Belt row crop operations would be to maintain a 40% ratio of working capital to gross revenue (current assets minus current liabilities) divided by gross crop revenue. This ratio was nearly double that 40% level for many farms in 2012 and 2013.
2) Secure repayment capacity. With interest rates at near record lows, lock-in rates now on longer-term debt and renegotiate repayment terms to free up additional cash to make crop operating decisions. This past winter most agricultural lenders did a nice job of reaching out to help qualified customers free up working capital by re-amortizing existing loans and reducing principal repayments. The operating lines of credit established for 2015 did not likely include storing a large portion of both 2014 and 2015 crops into the fall and winter months.
3) Control your costs. The knee-jerk reaction by many producers in light of the tight crop profit margins for 2015 was just to cut costs. A better strategy is to control those controllable expenses while maintaining great yield prospects. Prioritize your cost cutting measures early before the 2015 growing season progresses. Identify those input decisions that will be critical to maximize your economic return on crop inputs.
4) Maximize your 2015 yield. It's still the total bushels produced and marketed that will generate the total gross crop revenue you'll need to pay both crop-related and family living expenses. Think ahead now to the 2015 crop harvest and how best you might manage on-farm drying and storage capacity. Consider on-farm versus commercial costs for those corn bushels that you can't manage on-farm. Perhaps pre-harvest marketing new crop corn and soybeans, then delivering directly from the field to avoid shrink and storage costs as well as harvest basis risks.
5) Manage price risks. Many farms still have their working capital tied up in unpriced 2014 bushels. Consider making old and new crop sales in the spring and early summer months. That's typically when the futures markets build in a risk premium for corn and soybeans.
Remember, a majority of the global feed grain crops are grown in the northern hemisphere. Should the 2015 crop yield prospects remain large into the late summer months, the risk of both lower futures prices and wider basis will likely increase. Storing two years of crops into 2016 could prove expensive and add to a farm's financial risks.
Summing up: The good news for cash-strapped farmers is interest rates remain low, but keep in mind they will likely go up later this year. Consider borrowing money now while interest rates are low if money is needed. But don't overdo it. High debt in times of lower cash flow can be a recipe for disaster.
Free up some cash and keep your bills paid. Selling most of your remaining grain would be a first step to free up working capital, followed by cutting unneeded expenses. Looking ahead, what if farmers don't market their old crop and it stays in the bins this fall? We'd likely have big problems with lack of storage.
Think forward to mid-September. I don't believe farmers nor grain elevators will build a lot of bins between now and harvest. If you have enough working capital, you could build more storage. If so, get it started early. We'll likely have lots of 2014 corn still sitting in storage and getting in the way of new-crop corn and beans at harvest.
With razor thin profit margins for 2015 crops, or in some cases no profit margin at all, you need to plan ahead now by utilizing these five crop risk management strategies. There's an old adage that says, "Failing to plan is planning to fail."For farm management information and analysis go to ISU's Ag Decision Maker site extension.iastate.edu/agdm and ISU Extension farm management specialist Steve Johnson's site extension.iastate.edu/polk/farm-management