For those of us in the agriculture business, it’s no secret that 2015 and 2016 were challenging years.
Maybe some of the most challenging we’ve seen in quite some time. And truth be told, 2017 is looking like it will follow suit. In an industry known for its optimism, you would be hard-pressed to find anyone overly positive about what lies ahead this year. But I always think there is promise on the horizon if we can push through these challenging times and enjoy the prosperity that will certainly come. In the meantime, there are some steps that producers can take to adequately prepare for 2017 and beyond.
1. Know Your Numbers: As lenders work with you to project what the next year will look like and how they can best serve you, it will help to be prepared with key data points, including:
• Planting intentions – Know your acres, crop type and fertilizer application plans
• Working capital needs – Know what is changing and some ways to improve your working capital
• Break-even analysis – Know your input costs, conservative bushel projections and sales triggers
• Expense management – Know what specific changes are being made in your operation to endure lower prices and what further trimming can be done in the year ahead
• Balance sheet basics – Have a good understanding of your current amount of working capital, your overall debt-to-equity ratio and value of your unencumbered real estate
2. Be a Tough Negotiator: With the significant price changes we have seen in the grain complex, those who sell to farmers are having a harder time making the next sale. That means you have an opportunity to attain better prices when you spend money.
• Cash rents – In general, landowners will need to make some concessions on cash rents. Be willing to negotiate but not afraid to walk away if the math doesn’t work for you at renewal time.
• Equipment – There are definitely deals to be had on used iron, but only do what makes sense for your operation. Also, aggressive lease terms are being offered and in many cases may lower cost, or improve cash flow, throughout your operation.
• Basic purchases – Those who sell you crop insurance, seed, fertilizer, chemical, parts, equipment and a whole host of other products will need to know that farmers are carefully weighing each purchase. Loyalty to such suppliers is wonderful but it is also okay to encourage competition for your spending dollars.
3. Sell Items that are Not Contributing: The truth is there are some things that just need to go. Whether it is a poor piece of land that isn’t producing, a tractor that might not be essential or a trailer that is collecting dust, take stock of what you have and determine what needs to go.
During this period in which some producers will have limited working capital and struggle to service debt, it is imperative to critically examine your assets. Working capital and liquidity have become – and will continue to be – critically important in the coming years. Any asset sale that bolsters your liquidity position will improve your ability to endure the current commodity prices as we look forward to better days.
Lance Albin is vice president, agribusiness commercial lending officer at UMB Bank and has more than nine years of experience in agriculture financing. He has a master’s degree in business administration from Fort Hays State University.
