Taking on unnecessary burden can impact on cash flow
We have said goodbye to 2023. For many people, not soon enough. 2023 brought a worldwide drought crisis and conflicts in the Middle East and Ukraine. 2023 also brought continued uncertainty with North Korea, China and Iran.
In the United States, we continued to fight inflation, the highest interest rates in almost 20 years, and a drought that has now existed for several years that started in the western states and has steadily moved eastward. They all have a negative direct impact on agriculture in the United States.
One glimmer of positive news in the agriculture sector was that 2023 saw record-high beef prices. As drought conditions have worsened in the U.S., cow herds have shrunk to a level not seen since the early 1960s. Farmers nationwide have reduced the size of their herds because of the high feed prices, mainly hay, and the lack of water supply. With the record high prices, most farmers are deciding to sell their heifers rather than retain them for herd replacement or expansion. This helps to ensure that beef prices will remain high until the herd numbers are built back up, the U.S. starts importing more beef, or people quit eating as much beef.
Many farm operators with ample access to relatively affordable feed options are seeing a positive bottom line and will face tax obligations. Farmers often react to this by buying new trucks or replacing machinery. Generally, it is not prudent for farm management to take on a five- to seven-year debt obligation to reduce your tax burden for one year. It is hard, particularly in agriculture, to forecast what net income and cash flow will be for five years or beyond. Taking on an unnecessary burden might negatively impact future cash flow and the ability to service debt.
What is a solution?
Most of the U.S. has faced several years of drought. Many pastures and hay lands are overgrazed as farmers desperately try to figure out how to keep their herds intact. Also, fertilizer prices have been extremely high in the last few years, and many farmers cut back on their fertilizer expenses. I heard a presentation in early December that mentioned how we lenders often make the mistake of extending loans to our ag customers to make unnecessary purchases simply to reduce their tax burden.
The presenter’s advice was to advise our beef operators to focus on pasture and hay land improvements. To reduce their tax burden by correcting the issues overgrazing has created on their farmland. Fertilizer prices have dropped, so now is the time to have soil tests done and bring our land back up to test.
There is no better time to clean out ponds and improve water quality than when drought has left the water level low. Invest in watering systems that can help offset issues that droughts can create. Enlist the help of extension offices to advise on how to improve forage quality. Government grants and other types of cost-sharing programs can provide financial aid to forage and farm improvement.
Investing in your land will reap longer-lasting rewards for your farm operation and make more financial sense than investing in another depreciable asset.
Kim Light is the president and senior credit officer at Heritage Bank of the Ozarks.
