It s no secret that farming today is a bigger and riskier business than ever before.
Gone are the days when farmers just farmed and the finances, in large part, took care of themselves. Today, keeping a finger on the pulse of a farm s financial position is vital, says Mike McGuire, TD s district manager for southern Alberta.
In today s world, good management is critical for survival, he says. Thirty years ago, farming was a way of life. Now it s evolved into a way of business, and it s directly impacted by global events. Now, it needs to be handled like any business.
Successful farming operations require more sophistication, better management, more equity, and a need for greater risk management strategies.
The good news is that opportunities for farmers today are huge, says McGuire. Opportunities are probably better than they ve ever been for those who can compete at the levels that they have to in order to survive in today s world.
However, these opportunities also bring uncertainty, he says.
The uncertain global economy, changing weather patterns, and investor interest in commodities will all drive price volatility, and that will mean producers will need better and better management skills to compete.
First and foremost, McGuire counsels that producers need to be planning for the future.
There was a tendency years back to not look as far forward, he says.
Now, planning should look two, five, 10 years into the future.
Rates may not last
And, he adds, farmers need to remember that the future won t necessarily look like today. For example, assuming interest rates will stay at today s historic lows would be a mistake, says McGuire. Instead, he suggests farmers make reasonable assumptions about the future and err on the side of caution.
Because expenses are high and margins are thin, it s vital to know cost-of-production numbers, says McGuire.
Access to capital has become a very significant issue in today s world and will be more so going forward, he adds. Producers today are looking for significantly more money, to the point that a lot of farm operations are capitalized to the level of a mid-size business.
Another key is having a sufficient line of credit and adequate liquidity while keeping leverage at a reasonable level. Banks have leverage guidelines for each farming sector derived from a peer group comparison. If a farmer is more highly leveraged than those guidelines, risk becomes a bigger issue.
While farmers could get away with growing just one or two commodities and selling to a single market three decades ago, spreading risk is almost mandatory today. In addition to crop insurance, there are many ways farmers can hedge, from diversifying into a new business, growing a variety of crops, or engaging in futures commodities or foreign exchange.
Hedging opportunities are there if you can learn how to use them, says McGuire. They offer some good opportunities to make money, as long as you don t get into the speculating side.
Work in progress
Farmers are more aware of their finances than they were years back, but additional effort is still necessary.
Compared to 30 years ago, there s no question that farmers are managing their risk better, says McGuire. But is everyone at the level they need to be? It s a work in progress.
One of the most difficult things for many farmers today is understanding and managing the financial reporting required by banks.
Thirty years ago farmers resisted giving financial information because they didn t have it, or it was all in their heads (or perhaps a shoebox). But, in today s world, you need much more sophisticated reporting. If the information isn t accurate, you re really putting yourself at risk.
While hiring an accountant or financial planner can be a good first step, a farmer still needs to understand his or her farm s financial situation in order to make sound business decisions. This is increasingly important when applying for a loan.
Lenders are willing to work with farmers but they require solid information when the loan application hits their desk.
It was an easier process 30 years ago, says McGuire. Now it s a lot more complex: you have to prove you can make money, and there s greater risk because there s more money involved.
Understanding financial management is a component of overall management. It s certainly a component of whether a bank will lend. The farmer who understands their full operation is undoubtedly a better risk.
Comparedto30yearsago,there snoquestionthatfarmersaremanagingtheirriskbetter.But,iseveryoneattheleveltheyneedtobe?It saworkinprogress. mike mcguire