Most doctors recommend an annual checkup, and so does Mark Muchka – of your farm’s financial health, that is.
“Muchka, a business strategist from Ag Info Market in Airdrie, told a seminar here three big financial factors that will mean additional risk for farms over the next few years. These factors may not influence farmers who have been in the business for a while and who have large amounts of equity built up, but will be of more concern to newer producers.
One factor that has already arrived is the wide variability in input and commodity prices. “We’re seeing things in the market that we’ve never seen before and it seems to be the new order,” said Muchka. “This is how it’s going to be for a few years to come.”
In order to protect against financial risks, producers should know their break-even point because prices are a little softer for commodities, said Muchka. “We are starting to see a trend that interest rates and input costs are on their way back up,” he said. He advised producers to write a few scenarios and understand what it will take to break even.
Calculating the volatility of an operation is also important. “It’s about trying to create a more consistent return on our farms,” he said. Muchka believes rising interest rates will represent significant financial risk on farms. “Any forecast I’ve read says that we’re in for at least a four to six per cent increase over the next few years,” he said. This can affect anyone who may choose to purchase extra equipment or use extra money to expand their business. “This could mean that in a few years, you’re paying five or seven per cent more in interest,” he said. This could take the cash flow of an average-size farm down to zero.
He advised producers to look at their past five years of both revenues and expenses and use it to forecast ahead. “Again, this isn’t something that the older generations will have to do, but this is something for you younger folks,” said Muchka.
DEBT A GROWING CONCERN
He said Alberta farm debts doubled from 2001 to the present, while net farm income has not changed much.
“As we’ve expanded or purchased inputs, we’ve been using debts to do it. Right now, the average Alberta farm would need all their income to pay off their debt.”
The trend of increased debt is widening, a sign of huge financial stress. Producers who are carrying large debt loads will be at considerable risk with an increased interest rate.
Heavy use of nitrogen fertilizers in China since the 1980s has resulted in severe acidification of its soil and some cropland in the south of the country can no longer be used, a Chinese expert said.
“In the south, heavy use of fertilizers has pushed the pH to 3 or 4 in some places. Maize, tobacco and tea cannot be grown. This is a long-term effect,” said Zhang Fusuo, a professor on plant nutrition at China Agricultural University in Beijing.
Acidity is measured by pH, which ranges from 0 (strongly acidic) to 14 (strongly alkaline). Most plants grow best in neutral soil with pH from 6 to 8.
“PH that is under 5 is very serious, under 4 a lot of trees cannot grow,” Zhang told Reuters by telephone, adding that the problem was serious in the southern province of Hunan.
Soil acidification occurs naturally from factors such as acid rain, but this problem has worsened with the overuse of nitrogen fertilizers.
China’s grain production and nitrogen fertilizer use hit 502 million tonnes and 32.6 million tonnes in 2007, up 54 per cent and 191 per cent compared to 1981, according to Zhang and his colleagues, who published their findings in the journal Science.
They examined two soil surveys in the 1980s and 2000s and found that soil throughout the country had become more acidic since farmers started using cheap nitrogen fertilizers like urea and ammonium bicarbonate in the 1980s.
“The average pH in all of China has decreased by 0.5 unit in the last 20 years. Left to nature, a single unit change needs hundreds of years or even over 1,000 years, but we have got this change now due to fertilizer overuse,” Zhang said.
Soil acidification can be reversed quickly with lime, but that is an expensive and labour-intensive process that farmers in China are reluctant to undertake.
“The government doesn’t subsidize but we hope that through our work the government can help. However, lime is only the third option,” Zhang said.
“The first option is to reduce the use of nitrogen fertilizers, the second is return straw, or crop residuals to the land to reduce acidity,” Zhang said.
“Now burning (of residuals) is still used because returning it is labour, machinery intensive. The government should subsidize machinery costs.”