Tips to help farmers
Farmers are acutely conscious of the cyclical returns in agriculture. Factors beyond their control can swing prices too much or too little. U.S. row crop producers are currently experiencing the positive side of the price swing; however, rising input prices continue to create headwinds that make it even more important for farmers to remain prudent.
Here are four helpful tips that can used to help navigate through these unique times.
1. Strengthen your banking relationship
A strong banking relationship is arguably one of the most important business relationships a farmer should have regardless of the size of the operation. These relationships tend to be put on the backburner during stronger years, but it is as equally as important to keep the communication lines open during the good times.
Good communication is key to any banking relationship, but even more so in the ag industry due to its cyclical nature. Be proactive when it comes to financial concerns. An established bank with in-depth knowledge of agriculture should be well-positioned to guide farmers through the good and bad times, but this type of guidance can only be provided if the lender is informed.
2. Use crop projections as a cash flow tool
Put the pencil to the paper. While Mother Nature makes it difficult to project the exact annual revenues and expenses, crop projections and fall harvest cash flow projections are useful tools that should be prepared annually regardless of commodity environment.
Crop projections will not only help identify the best crop mix and monthly cash flow shortfall but will also provide some clarity by establishing a break-even price, which is extremely important given the run-up in inputs.
Fall harvest cash flow projections should be prepared prior to harvest as this provides an overview of cash inflows and outflows to help determine if any shortfalls might exist during harvest. In the event a potential shortfall, this is a great time to sit down with your banker to establish a game plan to work through that shortfall.
Once the year-end financials are finalized, it is important to compare the actual results to the projections as this can help identify expenses that need to be more of a focus for the upcoming crop year.
3. Focus on your grain marketing strategy
A written marketing plan is crucial as it helps you make sound decisions and creates accountability. Avoid the wait-and-see approach. Marketing plans should be ongoing and adjusted to fit the farm size and market conditions. In a bull market, it’s easy to get complacent when marketing grain, and a lot easier to hit singles and doubles than homeruns.
One approach is the scale-up method where you contract a small percentage of the crop at the point of profitability during the spring and continue selling as the market moves higher. This allows the farmer to take some downside risk off the table while leaving enough chips to capitalize on the potential for market upside.
Once the crops have been planted, the focus will be on yields, which could create additional marketing opportunities. However, with any market it is important to be aware of the downside risks on the uncontracted grain. A few options to mitigate those risks include put options and minimum price contracts.
As always, it is recommended that the farmers consult with an expert to better understand various hedging options.
4. Soil fertility management
All inputs used in row crop production have experienced varying degrees of upward price pressure. The war in Ukraine has amplified the concerns around the affordability and availability of fertilizer. The big question is how long the prices will stay elevated.
One option farmers should consider for 2023, if not already completed in 2022, is deep soil testing prior to planting.
With minimal options to mitigate the increase in input prices, deep soil testing is gaining more and more attention as it will help determine the most appropriate type and rate of fertilizer needed, which could improve the bottom line depending on the amount of residual in the soil.
As farmers are aware, the ag industry is always changing and price fluctuations will continue to create tailwinds and headwinds for their financial bottom line. By ensuring you have a strong banking relationship, crop projections, marketing plans and strategic soil fertility management, you’ll be able to navigate through the good and bad times.
Michael LaPlant is the vice president of agribusiness at UMB Bank.