More farmers are storing large volumes of unpriced bushels this fall and will likely run into a cash flow crunch by late winter. It’s already started for some and will continue to affect more producers in 2018, say ag lenders. These farmers don’t have enough cash on hand to meet current and future debt payment obligations, let alone make advance purchases of seed and other 2018 crop inputs.
“With large supplies of corn and soybeans and low harvest prices, we expect to see more farms with cash flow challenges,” says Steve Johnson, Iowa State University Extension farm management specialist. “That’s particularly the case for farmers with poor 2017 yields and those storing a lot of their crops unpriced. This is especially true if those bushels are stored commercially with higher costs and less chance for basis improvement.”
Need to generate some cash soon?
Lenders say at least half of Iowa’s farmers will need to generate some cash by the end of the year to pay operating notes, second-half cash rents, other payments to suppliers and family living expenses. The question many farmers face is: “When will crop prices rally enough so I can go ahead and price some of these bushels sitting unpriced in storage?”
Some farmers want to prepay for seed and other inputs for the 2018 crop. Most farmers will sit and hope for a price rally to generate cash to pay the bills. Johnson, however, suggests looking at other crop marketing strategies and tools, especially with the large carry in the futures markets. For bushels stored on-farm, consider a May or July storage hedge or the use of a hedge-to-arrive (HTA) contract for spring delivery.
Communicate with your lender
“If cash flow is a concern, talk to your lender,” he advises. “Some farmers say, ‘I’m going to avoid my lender. I don’t want them to know I can’t pay them what I owe.’ You should do the opposite. Don’t hesitate to communicate. Get to the lender early and let them know your situation. Be prepared to answer pointed questions. How many bushels did you get priced? How much can you pay down on your existing operating note? Are there other creditors that you owe money?”
Try not to push all of this discussion off until after harvest. “Fall is the time to communicate, not only with your lender, but also your other suppliers,” says Johnson. “You may have a crop insurance premium that was due Oct. 1 that’s now incurring interest at 15% annual percentage rate. This is a good example of a cash flow item farmers have just got to stay on top of.”
Cash flow is important. Some lenders still say “as long as the farmer has adequate equity, that’s OK. I’ll lend them the money they need. I’m a balance sheet lender.” But a lot of lenders found out the hard way in the 1980s that cash flow pays the bills. Many balance sheet lenders are getting frustrated with the increase in borrower constraints due to inadequate cash flow and working capital. Refinancing existing debts might no longer be an option. “Thus, we can expect that more borrowers will need to obtain a USDA Farm Service Agency guaranteed loan approval,” Johnson says.
Figure out how to generate cash
December could prove to be a good time to figure out how you can generate cash flow for the winter. Crop production numbers are known and basis tends to narrow in late December as bushels are locked away. Also, the “quick ship” bids to processors around the long Christmas and New Year’s weekends can be some of the best basis opportunities of the winter. Johnson advises working with the grain merchandiser in advance of delivery if you decide you want to re-own these bushels. You won’t get the carry, but the storage costs can be eliminated and basis risk eliminated.
Johnson cites a 32-year Farm Futures magazine crop marketing study. It shows the average farmer in Iowa lost money storing until late June unpriced corn commercially in each of the last two years. Higher commercial storage costs and interest rates without marketing discipline are getting expensive.
When is best time to sell?
In each of the last three years, the highest futures prices for both old- and new-crop corn and soybean futures were in June or July. However, many farmers don’t want to sell futures or contract ahead to deliver the crop during or after harvest. They often become bullish about futures prices and don’t yet know if they’ll have a crop to fulfill the forward cash or HTA contract. “Farmers are often distracted in the late spring and early summer. But when those futures prices rallied, that was the time to reward the market,” says ISU Extension farm management specialist Steve Johnson.
This shows the importance of preharvest marketing and using revenue protection (RP) crop insurance, he adds. “Try to generate your cash flow needs using the spring and summer price rallies, rather than wait until harvest to figure out how you are going to find enough cash.”
RP crop insurance works
“I can understand a farmer who was in an extremely dry area in July being a little reluctant to use futures markets when they didn’t think the crop was going to come in anywhere nearly as good as it ended up,” says Johnson. “But that’s where a crop Revenue Protection policy for crop insurance works.”
For every bushel of corn covered by Revenue Protection you were producing in 2017, you were guaranteed $3.96 per bushel — that was the December futures price average for the month of February — and $10.19 per bushel for soybeans. “When futures prices were above those levels, you should have been selling and committing bushels for delivery,” says Johnson.
“You don’t have to hedge; you can use a forward-cash or HTA contract,” he points out. “Because you are either going to get the money from your crop insurance indemnity claim or get it from the market. For the last three years in a row, we now realize, we probably need to improve our crop marketing skills tied to crop insurance and preharvest marketing.”
“Some farmers need to make a change and start thinking about preharvest marketing more of their bushels to make it easier to meet cash flow needs,” says Johnson.