What began as an optimistic year for the American farmer and rancher has quickly turned into doom and gloom. Is there a silver lining in this cloud?
The answer is yes. Unlike previous times of drought, farmers and ranchers have just come off a record year for farm income. Many, learning from those who suffered in Texas and Oklahoma last year, protected this year’s income by purchasing crop insurance, locking in feed prices and price protecting their livestock. The mild winter we had led into abundant grass and hay production in the spring, even earlier than usual, giving cattle a good start to the year. It also allowed for earlier planting of crops, which has permitted harvest earlier in the drought than would have been. If not for these advantages going into the 2012 drought, the outlook for the agriculture industry could be much, much worse. But, even though it might not be as bad as it could be, what can farmers and ranchers do now to protect their livelihoods, lessening the financial strain of the drought?
The first step that must be taken is to take a survey of farming operations, unclouded by emotion. A farm operation is a business operation just like a manufacturing business. Too often we in the industry react and make decisions without considering the long-term goals, such as, keeping that one cow because she has ‘always’ produced a good calf in the past, regardless of condition, or buying that new tractor because it was a good deal (and you needed the tax write-off anyway). Just as this year has demonstrated, things can turn around in a hurry. Where do you see your operation in the next 10 years and what can you do now to make sure you reach that goal? What parts of your operation are contributing to it and what parts are draining it? View the drought as an opportunity to make needed changes to your operation. It might involve selling part of your breeding herd to save the rest, or selling off some of that equipment you use once a year, if that, but if it is the difference between losing it all now and being able to build back up when the weather changes, it may be worth it.
Many farmers and ranchers are aware of the availability of crop insurance, irrigation and price protection through the futures market and put options. As you evaluate your operation, be creative. Consider the wet-weather and year-round springs on your property – could these be developed into irrigation wells or cattle watering holes? Perhaps you’ve always sold your cattle through the local stockyards and protected your price through the futures market. Should you consider selling your cattle through video auction now for delivery down the road, locking in that price before it falls further? When evaluating your feed input costs, are there advantages of bulk purchases or buying separate commodities and mixing the feed yourself rather than buying the pre-mixed rations? These are just a few of the many questions to consider.
Secondly, talk with your banker and/or other financial advisor; someone who has financial experience and who will provide individual attention to your particular operation. Many institutions and the government are offering low interest operating loans or offering grace periods on payments to assist with the income shortfalls brought about by the drought. There are also tax issues specifically related to drought-related matters that your accountant can help you navigate. For example, gains from federal disaster payments or livestock sales could possibly be deferred to the next year.
If an emergency loan is not for you but you still have cash flow issues, talk to your lender about restructuring. Negotiate your rates; they are still at all time lows and now is the time to get those long-term rates locked in for as long as possible. If you are looking at refinancing with another institution, be sure to find out if you have a pre-payment penalty on your current long-term loans – a large penalty could offset any gains you might receive in a lower interest rate. Consolidation of multiple loans into one long-term, low, fixed-rate loan is another possibility to improve cash flow. Discuss these options with your lender; times like this call for creative lending.
Make plans now to prepare for next year. During this same time period a year ago, many of us in the agriculture industry were looking for a good next year, one that did not materialize. Preparing now for another difficult year will put you that much further ahead. If the industry is hit by another drought, you will be ready. If we are granted a good year, you will be able to move again into expansion mode. For example, consider a farmer who refinanced his loans last year at a lower, long term fixed rate and used his extra cash last year to make improvements to his operation, such as subdividing his pastures into intensive grazing paddocks and fertilizing his fields and planting more grass. Because he chose to make those changes then, he is in better condition to withstand the drought this year. Imagine what he could have done if 2012 had been a normal year. Times like this prove that equity and liquidity pay off.
Jessica Bailey is a Credit Analyst in the Agricultural Loan Department at Arvest Bank in Neosho, Mo.
