Agriculture is a funny business. Someone’s misfortune can be someone else’s fortune. The U.S. is suffering with one of the worst droughts in recent history, and drought has affected other grain-exporting nations such as Russia and Ukraine. The Canadian Prairies, on the other hand, are experiencing a one-year-in-10 harvest that is seeing above-average prices for grains and oilseeds. Prices for feed, seed and fertilizers are at historical highs, and even after a reasonable year in 2011, farmers are going to see good margins and returns in 2012.
“We have addressed drought in Western Canada in 2002 and low prices in the last decade, but what decisions do producers have to make when times are good?” says Rick Dehod, grain farm business specialist with Alberta Agriculture and Rural Development. “Ag lenders will tell you that good times cover up bad loans and poor management decisions as there is more room for error and forgiveness. However, staying diligent will help you position your farm for the tighter margins that will eventually come.”
Points to consider
Extension economist William Edwards of Iowa State puts forward a few suggestions that producers may want to consider:
- Improve working capital — look at reducing operating loan balances. Strong margins allows equity to improve. These retained earnings can be used to strengthen the farm’s working capital position so that the farm is in a good financial position to weather the next storm or seek opportunities to grow when they arise.
- Replace assets — update your machinery line and replacing equipment now will lower cash flow requirements as new technology provides some efficiency and decreases repair costs. Expand cautiously using equity dollars as much as possible. High leverage and debt payments incurred in good times, put a great strain and risk on an operation when margins get tighter. Borrowing to grow a business is acceptable as long as your financial ratios are in line.
- Improve efficiency — look for ways to invest in cost-saving technology. Innovations in guidance systems, grain handling and drying, and agronomy will save money in the long run. Knowing your cost of production and managing these tools will increase viability when margins are slim again.
- Reduce debt — provides a guaranteed return on your investment. Improving your equity gives you the financial strength to weather the next financial storm or for access to credit when you wish to borrow in the future.
- Fix interest rates — while current interest rates are at historical lows, look at fixing your interest rates. Interest shows up as an expense on the income statement. Today’s long-term rates may be a bonus and mitigate some risk a few years from now. There are two ingredients to interest expense, interest rate and debt levels. Try to decrease both.
- Negotiate a flexible lease — as you negotiate a new land lease or renegotiate old leases look at incorporating both actual yields and prices into a formula that will automatically reduce rental costs when revenues decline. Avoid locking into high land rent leases unless you can lock in your prices for the same period.
- Diversify your assets — agriculture is not the only place to invest your money. Non- farm real estate, equities, or mutual funds can return a steady income at a level of risk you may be comfortable with. GICs, Tax-free savings accounts and RRSPs may be a secure place for your cash, and provide you with a rainy day fund or finance you.
- Consider Agri-Invest — each year, producers may elect to deposit up to 1.5 per cent of their Allowable Net Sales, subject to program limits, to an Agri-Invest account and receive matching government contributions.
- Pay some income tax — after reviewing all tax strategies, it may be better to pay the tax and retain the balance in cash rather than buying a depreciating asset that the farm does not need at this time.
- Take a vacation — you’ve worked hard. You and your family deserve a vacation, especially when the income is there.