The sharp fall in grain and oilseed prices has dramatically altered the farming landscape. But many farm business experts say the fallout won’t be felt until 2015. Merle Good is one of them. And he says many farmers at the greatest risk don’t know it. He spoke with editor Glenn Cheater.
Q: You say if there’s not a significant rebound in grain and oilseed prices, a lot of producers will be financially vulnerable, but they won’t realize it right away. When will they feel the pain?
MG: It will hit home when they go to buy inputs for the 2015 crop year. So if prices stay low and we still have restrictions on the movement of grain resulting in unsold inventories, I believe November 2014, and going into the 2015 crop year, will bring the first indicator of trouble. Of course, if things are stagnant, it’ll be even worse for the 2016 crop year. Those who have a fairly strong balance sheet and significant working capital will be fine, but those who don’t had better be worried.
Q: Don’t you know if you’re in that boat and heading for trouble?
MG: The main issue is that it’s difficult to project that unless you do budgets. And a lot of producers do not do two- to three-year forecasts of cash flow, income statements, and debt payments on a detailed basis. So when trouble comes, they’re in a reactive mode rather that in a proactive planning mode.
Q: Don’t you need a crystal ball to do that?
MG: Of course, variability is why a lot of producers don’t do that kind of budgeting. No one thought barley would be around $3 in mid-February when it had been as high as $5.65 (a bushel). So your forecasts can bounce all around and a lot of producers say, ‘Why bother? I can’t control the market anyway.’ But I think you have to do that to determine the impact and see what it does to your net income and working capital. Cash flow is the lifeline of any agricultural business because our business is so cyclical.
Q: So how does that play out?
MG: Fertilizer prices are up quite a bit since November and a lot of producers would have bought their fertilizer then if they had the liquidity to buy it. But they had grain they couldn’t deliver. So it can be a self-fulfilling situation: If you don’t have liquidity, you can’t purchase inputs when you think they’re in the lower range of the price cycle. And it’s usually the same when you want to sell. This year was unusual in that you would have made more selling it off the combine, but usually you make more by holding it and waiting until prices are higher. That’s the trap you get into — you can’t buy inputs when you want to and you’re selling grain when you don’t want to.
From the Country Guide website: North American grain/oilseeds review: Canola down with pre-weekend profit taking
Q: You have one financial ratio that you say is key, and which you compare to a blood pressure test. First, what’s the ratio?
MG: Take your operating loan and add your accounts payable plus any cash advances you’ve received. Then divide that by the total of your unsold inventory plus any accounts receivable and any prepaid inputs. Let’s compare two farmers with $1 million in unsold grain and prepaid inputs. Let’s say Farmer A owes $400,000 for his operating loan, unpaid bills, and a cash advance. He’s at 40 per cent and that’s pretty good. But Farmer B owes $700,000. He’s at 70 per cent and that’s trouble. Any time you’re higher than 50 per cent, you should be worried.
Q: What should you do then?
MG: Well, that’s why I call it a blood pressure test. There could be a lot of reasons why you have high blood pressure. Maybe it’s your diet or not getting exercise or stress or some combination of those and other factors. You need to investigate and find those causes. But you also need to take immediate action. For one farmer I worked with recently, the action was to go to the creditor and take some of his short-term loans and spread them out over a longer term. We did a lot of this in the ’80s and early ’90s.
Q: So the goal is to have enough cash so you don’t have to do things you don’t want to do?
MG: That hits the nail on the head. You know what they call high blood pressure? The silent killer. It’s the same thing with the operating capital ratio. If you don’t keep track of that, it can be a silent killer. You run short of cash and then you can’t function. That’s when you’ll start panicking. And that’s why you want to take the test and, if you need to, take action now.