“We’re going to be going into a period of significant cash flow shortages for farmers — maybe not all, but many,” said Tom Steve, general manager of Alberta Wheat and Barley.

“Late enrolment would be fine, but is it going to solve the short-term cash flow problems that farmers are facing in Alberta? I don’t think so.

“We’re going to see after this year how effective AgriStability is for Alberta grain producers. I suspect that the results will be very mixed.”

The late participation mechanism, introduced in 2018, lets producers sign up late (with a 20 per cent penalty) when there’s a significant drop in income resulting from disasters in a region — but only if Ottawa and the provinces agree. This year, Manitoba and B.C. took up a federal offer to extend the deadline until the end of the year, but neither Alberta nor Saskatchewan did.

There’s likely a couple of reasons for that, said Steve Funk, director of ag risk management resources for MNP.

“The province has to agree with the federal government because the programs are funded 60/40 — 60 per cent federal, 40 per cent provincial,” he said. “If they agree to open it up for late participation, that agreement is for the entire province, so what starts out as a sectoral or regional decision ends up being opened up for everybody.”

Moreover, earlier this year, the normal enrolment deadline of April 30 was extended to June 30 because of changes to reference margin limiting. By then, the effects of the drought were already being seen.

“I know a lot of the actual impacts of the hot weather were felt after June 30, but they could have been anticipated before,” said Funk.

And given the “systemic issues” with AgriStability, late enrolment wouldn’t likely see many takers anyways, said Steve.

“The numbers are something like 20 to 24 per cent of all Alberta grain farmers participate in AgriStability, and that’s really low,” he said. “They haven’t been able to qualify for AgriStability payments over the years, so the dropout rate is very high.”

In contrast, the crop insurance enrolment rate is closer to 80 per cent because the payouts are more predictable and arrive faster.

“For grain farmers, it comes down to making a choice — are you going to roll the dice with AgriStability, or are you going to take the certainty of crop insurance?” said Steve.

“With AgriStability, if you can withstand a couple of years of bad margins, you’ll get a payout potentially, but for the small- to medium-size farms, it’s pretty difficult to rely on AgriStability, so they tend to use crop insurance,” said Steve. “But if you’re a larger farm and you can withstand the pressure of a short-term reduction in your margins, you’re probably going to take AgriStability.”

Beyond that, any crop insurance payments are deducted from any AgriStability entitlement.

“So if you get a big crop insurance payout as a grain farmer, it’s going to impact your ability to make use of the AgriStability program,” he said. “I think that’s the rub for many farmers.”

The change to reference margins from 85 per cent to 70 per cent in 2013 was another “deal breaker.”

“When you have to have a 30 per cent decrease in your net margins, there’s not too many farmers who would be able to qualify for that,” said Steve, adding the grain industry has been lobbying government to restore the old reference margin.

Another ongoing complaint is how complicated the program is.

“AgriStability is based on accrual accounting principles, so if you understand accrued financial statements and the concepts that go into building those, you’ll have no trouble interpreting AgriStability,” said Funk. “Unfortunately a lot of people don’t understand accrual accounting.”

The grain industry is hoping the next agricultural policy framework (which will run from 2023 to 2028) will include enhancements to AgriStability. The reference margin limit has already been removed, but at this point, the Alberta government has chosen not to co-fund increasing the compensation rate — something that would have been “very beneficial to farmers,” said Steve.

“At the end of the day, we need a better solution to disaster relief programming in Canada, and we don’t have it with AgriStability,” he said.

“Any recognition that we could get for the drought conditions that farmers are facing in Alberta would be appreciated, but would late enrolment in AgriStability be a panacea? I don’t know that it would.”

The cash flow issues that producers are facing are an immediate threat, one that can’t wait for a potential AgriStability payout in a year’s time, he added.

“Farmers are facing increasing risks to their income with the dramatic increase in fertilizer prices, seed costs, and fuel costs this year,” said Steve.

“Farmers are going to have their margins squeezed further, and ultimately, farmers can’t pass those costs on to consumers. And if you’ve had successive droughts south of the Trans-Canada Highway or excess moisture in the central parts of the province, your cash flow relative to your ability to finance next year’s crop is going to be compromised.

“Those are some of the conversations we’re having with the government right now to make sure that these headwinds farmers are going to be facing going into 2022 are dealt with.”

The post Late enrolment in AgriStability not much help, says Alberta Wheat appeared first on Alberta Farmer Express.

But there is help out there.

“It’s important for producers to know that there are more options out there than they may realize,” said Don Anderson, Farm Credit Canada’s senior vice-president of Alberta operations.

Some farm lenders, including FCC, are offering to ease the financial burden either through “injecting additional capital,” deferring some repayments, or a combination of both.

“That gives producers space so that they can make the decisions that are best for the operation under a little less stress,” he said. “One year shouldn’t make or break an operation.”

But this year is certainly putting many to the test.

“If you get to the southeastern part of the province, they’re struggling,” said Anderson. “They’ve had a little bit of rain, but where they desperately need the extra bit of rain, it hasn’t got there.

“Crops are definitely impacted, and if they’re getting a crop, it’s a subpar crop.”

The livestock sector has been hit even harder, he added.

“As we go southeast, a large part of our beef herd is located in these areas, and the pastures and forage are a real challenge there right now.”

On top of that is the China situation. First it barred imports of Canadian canola seed, and then meat.

“There are ongoing trade issues and tensions with a significant trading partner of ours in China, and that’s impacting both the livestock and the grains and oilseeds sectors, primarily canola,” said Anderson.

“That’s putting some strain on producers from a cash flow perspective. There are a lot of unknowns happening there.”

The debt dilemma

And while lenders can’t do anything about the weather or trade disputes, they can — and want to — help producers get through this period in the best possible shape, said Anderson.

As an example, he pointed to a livestock producer concerned about not having enough cash to feed through the winter.

“What’s their first response? Liquidate the herd. But that has a long-term impact,” said Anderson. “They’ve probably built that herd over time. They can buy it back eventually, but they can’t buy back exactly the same things.”

It’s a similar story on the crop side.

When producers have limited working capital, they may not be able to buy inputs at the optimal time, when costs are cheaper. Higher operating costs are the last thing a farmer needs when prices are going down.

“So can we come in and support them through different strategies so that they have that cash and that liquidity to get through to the next growing season until they can get a reset and start again?” said Anderson.

“At the end of the day, you may have more debt, but ultimately, it’s a choice: Do you want to have a stronger, more viable operation going into the future, or are you going to leave yourself a bit more exposed and in a weaker position to move forward?”

Cash advances

But loan deferrals and more financing are only two pieces of the puzzle that farmers must deal with, he added.

“This needs to be coupled with other options that are out in the marketplace, like interest-free periods for the canola cash advance that the federal government had announced,” said Anderson.

“That’s a short-term fix, and what we’re trying to do is look at our options — in conjunction with those short-term fixes — to get people over this hump.”

There are three dozen administrators of the federal Advance Payment Program, which allows producers to borrow up to $1 million every year based on the value of their grain or livestock, with the first $100,000 of that as an interest-free advance ($400,000 for canola). One of those administrators is Alberta Wheat, which launched its FarmCash program last year.

“The FarmCash program is another option for farmers to maintain their cash flow in a difficult market,” said Tom Steve, the farm group’s general manager.

“Really, it’s designed to assist farmers with managing their cash flow — reducing the cost of inputs in the spring and offering the ability to finance against inventories that they have on hand so that they don’t have to sell their crop or their livestock below the cost of production.”

Although part of the advance is interest free and the remainder “considerably below commercial credit rates,” the loan ultimately will need to be repaid — 18 months for crops and 24 months for livestock.

So producers need to be both mindful of the increased debt load they’re taking on and other program options available to them.

“We’re in a period where there are significant trade challenges and weather challenges in many areas, and we look at the FarmCash program as one tool that farmers can employ to manage their risk and get through some difficult circumstances,” said Steve.

“But it needs to be taken into consideration with the other risk management offerings that they have at their disposal.”

Government programs

In Alberta, those include federal crop insurance and disaster recovery programs administered by the Agriculture Financial Services Corporation.

“Every year, we have something new and different that comes up, but weather is one of those challenges that impacts agriculture every year,” said Daniel Graham, manager of business risk management products at AFSC.

“AFSC has a suite of business risk management programs that are available to producers to help mitigate some of the unique risks in agriculture.”

Two of them have been designed to provide a “backstop” to producers during disasters and other events that impact production or prices, he said.

AgriInsurance covers losses caused by designated natural perils for crops, hay and pasture, while AgriStability compensates participating producers against significant declines in farm incomes.

Both require producers to sign up by April 30 — although the deadline for AgriStability was extended to July 2 this year in response to the trade dispute with China.

“We’ve had an uptick in participation with that deadline extension,” said Graham.

For producers who didn’t sign up this year, now is “a good time” to start thinking about getting this protection for next year, he said.

“The best place to start is contacting your local AFSC office to have a discussion about what those business risk management programs are and how they can work for your operation.”

Farmers should do the same with their lender and financial advisers, added FCC’s Anderson.

“Before you make any significant decisions that will have long-term impacts on your operation, go in and talk to your financial services provider and ensure that you have all the information about what options are available to you.”

And while everyone hopes that the trade situation with China will be resolved and that the weather will be more favourable, producers need to understand all of these tools and the advantages they provide, the three experts said.

“Ultimately, farming and ranching are fairly low-margin businesses, so you need to be able to capture an advantage wherever you can,” said Steve.

“These programs are designed to assist farmers, and they should take full advantage of them.”

The post Struggling with cash flow? Take a second look at these farm lending programs appeared first on Alberta Farmer Express.

“Cash is the lifeblood of a business, but with so much emphasis usually put on profitability, it can be easy to overlook this fact,” said Rick Dehod. “Poor cash flow management can drive a growing and/or profitable company out of business. In the previous five years, we have seen a lot of farm families choose to expand and grow their farms. This has been through the investment of their equity and retained earnings, but also with debt.”

With margins squeezed by falling commodity prices and rising costs, new farms and leveraged operations are most at risk, he said.

“You don’t have to wait for a crisis to benefit from good cash flow planning. A properly developed cash flow projection can help a business foresee and prepare for potential shortages.”

Along with being able to pay bills on time, a cash flow plan can reduce interest costs through managed borrowing; increase interest income by transferring surplus funds into interest-bearing accounts temporarily; and lower costs by being able to buy inputs at favourable prices.

Reviewing last year’s performance will help you prepare for the coming year.

“Now that you know your yields, you might gain a better understanding of your cost of production so you can determine what a profitable price may be,” said Dehod. “With the winter extension season approaching, it may be a good time to gain more information on using the futures markets. It may also be a good time to seek assistance from your accountant or your mentor to fine-tune your operating plans. Cash flow management is part of farm business management, and the ultimate stress test of your farming operation.”

Alberta Agriculture has an Excel spreadsheet to project cash inflows and outflows for the coming year. Go to www.agriculture.alberta.ca and search for ‘cash flow analyzer.’

The post When it comes to cash flow, ignorance is dangerous appeared first on Alberta Farmer Express.

“They hate that,” deadpanned Trish Booy, agriculture business development manager at BMO.

“There’s a very big difference between short-term financing and long-term financing. Depending on where you are and what you’re going through, your financing needs are going to change.”

Booy spoke at one of three Success for Women in Agriculture kickoff events last month.

The program, which will run in five Alberta locations in January (see agfoodcouncil.com for details), was prompted by a survey that found a lack of financial literacy is one of the barriers that many women face in their ag careers.

Booy offered a quick primer on things such as short-term versus long-term credit. The latter is used to finance land and equipment; capital improvements; and business expansion — so you need to line up mortgages, term loans, or leases for those items.

She also addressed cash flow — a topic that often trips very experienced business operators.

“Understanding your operating cash flow is critically important,” she said. “You need to know your expenses and know the amount of capital that you need in that time frame to get yourself through.”

Cash flow is one of the key things that bankers look at when deciding to approve financing, she added. Lenders look at the ‘four Ms’ — money, markets, materials, and management.

“We do look at money, which is your cash flow, your past performance, and your projections,” said Booy. “Are you able to pay your interest portion on your loans and your principal? Where is the cash flow coming from that’s going to pay back that loan? Are we going to put you in a situation that’s not good for you?

“Sometimes a banker will say no, and they’re doing that to protect you.”

Banks will also look at your potential markets and the materials you need but ultimately, the decision often comes down to management.

“If you have a really strong manager, they will manage the other three, but if you’ve got a crappy manager, the other three aren’t going to work,” she said. “Any bank will look at management over and above everything else.”

Building partnerships

Banks can get a sense of your management style by looking at a few things, said Booy. The first is your personal credit bureau score.

“From a bank’s perspective, if you do a really bad job of managing your personal finances day to day, you’re probably not going to do such a hot job of managing your company’s finances day to day,” she said. “It speaks to management.”

Lenders will also want to know your personal net worth to make sure you have a safety net if times are tough.

“If your business goes belly up, what do you have backing you? Do you have some equity in your home? Do you have some investments or RRSPs? What kind of net worth do you have to save yourself in those times when we are in a recession?”

Having an industry market outlook tells the bank that you’ve put some thought into the “competitive environment that you’re in,” while a financial statement analysis “speaks to past performance.”

“That one is kind of a no-brainer,” said Booy, adding you don’t want to look at just your bottom line when determining your cash flow projections.

“Look at your financial statements and see if you can calculate your earnings before interest, taxes, depreciation, and amortization. That’s more of a cash flow picture that the bank will use when we look at lending to that operation.”

When meeting with your banker, take along your production records, forecasts, financial statements, personal net worth statements, accounts payables and receivables, and a list of inventory. Your lender may also want to see your personal banking information, tax assessment, a copy of fire insurance, and interim financial statements.

It may seem daunting, she said, but remember that your banker is on your side.

“If you walk into a bank, you should have somebody who you can build a relationship with, who you feel is a partner and a trusted adviser,” said Booy. “A banker’s primary duty is to use his or her expertise and sound judgment to help customers make the right decisions for their business.

“So don’t be afraid to have expectations of your banker because your banker works for you and your banker should be there to help you.”

The post Take these tips to the bank the next time you need a loan appeared first on Alberta Farmer Express.

“First, assess your financial position,” said Neil Blue. “Start with a quick cash flow, which is the money inflow compared to money outflow. List the amounts and timing of bills, loans, and personal living expenses to be paid month by month (or week by week if fine tuning is needed).

“To counter those payments, list expected income from all sources, including potential farm produce sales and any personal income.”

Depending on the results, producers may want to consider ways to speed up cash inflow or slow outflow, and perhaps let creditors know “that you are working on the situation,” said Blue.

Put the marketing plan into action by estimating the quantity and quality of inventory to sell, he said.

“As well as checking with your local buyers, consider using the Canadian Grain Commission’s Harvest Sample Program as a free way to get a base grade on your representative crop samples.”

Producers should also consider the merits of storing crops until prices improve.

“Some crops may have strong premiums for contracting into forward delivery periods while other crops may not offer any such premium,” said Blue. “After reviewing market outlooks, you’re as good a judge as anyone as to which crops have potential for price improvement and which crops are likely to provide flat prices at best.”

Producers should look at all potential market outlets for their crops.

“Include processors, feeders, and any other market or agent,” said Blue. “A crop damaged in one respect may still have desirable characteristics to certain buyers. On the other hand, you may have some high-quality crop that will command a premium in the market. For example, during August, some buyers raised their malting barley price bids and some strengthened their premiums for wheat protein.”

Blue suggests using the Advance Payments Program.

“To help with cash flow needs, a cash advance is available through the Canadian Canola Growers Association by using farm produce as security,” he said. “The maximum advance is $400,000, of which the first $100,000 is interest free.”

Finally, Blue recommends making a list of potential buyers for various crops.

“Make reference notes as you experience positives and negatives in your marketing. Also, I have a good start at a crop marketing contact list and it’s available on request.”

Blue can be reached at neil.blue@gov.ab.ca or 780-422-4053.

The post Will the money come in fast enough this fall? appeared first on Alberta Farmer Express.

“Cash flow projections are critical, especially in the summer months,” said Rick Dehod. “There isn’t much revenue coming in until harvest, but the farm’s operating expenses continue to accumulate and the bills have to be paid. A properly developed cash flow projection can help a business to both foresee and prepare for potential shortages, and to maintain a good relationship with suppliers and creditors.”

Cash is the lifeblood of a business, but with so much emphasis usually put on profitability, this can be easily overlooked, said Dehod.

“Of course, the bottom line is important, but poor cash flow management can drive a growing and/or profitable company out of business.”

With profitability margins tightening due to decreasing commodity prices and increasing costs, the risk to the farm’s viability and its ability to meet all of its commitments as they come due has increased.

“The risk is especially great for those expanding farms and those individuals in the beginning of their careers who levered their equity to grow,” said Dehod.

Cash flow management can also help:

• Maintain adequate cash reserves to pay bills and payments on time or invest in expanding the business should an opportunity arise;
• Reduce interest costs through managed borrowing;
• Increase interest income by transferring surplus funds into interest-bearing accounts temporarily, if appropriate;
• Control costs by having the cash available to take advantage of buying inputs at favourable prices;
• Improve relations with lenders and creditors;
• Plan for the next crop year.

“Businesses that prepare cash flow projections often learn something about their systems, and the dynamics of their business,” added Dehod. “The process often has other positive outcomes as well. For example, you might discover that you need to pay more attention to markets to obtain the right price. Or, you might get a better understanding of your costs of production to help determine what a profitable price may be, and can then develop your 2016-17 marketing plan. For livestock producers, knowing your costs can help you access livestock price insurance to help protect your profit.”

For help with financial analysis, visit Alberta Agriculture’s website and search for ‘cash flow analyzer.’

The post It’s time to slip back into the office and review cash flow appeared first on Alberta Farmer Express.

“This next business cycle could potentially do to grain farmers like BSE did to cattle operators,” said Kim Gerencser, president of Growing Farm Profits, a farm advisory firm in Saskatchewan.

“BSE forced the marginal cattle producers out of the industry, and I think that if the downward cycle extends for as long as some of the economists believe it could — they’re saying upwards of 10 years — that has the potential to have the same effect on grain farmers.”

Canadian producers have been in the middle of a ‘commodity super-cycle’ since 2007, said Gerencser. But that “bull run” is at an end, and producers who were more ‘grasshopper’ than ‘ant’ during the good years could be in trouble now.

“The funny thing about prosperity and successive years of prosperity is it allows people to form some really bad habits,” he said. “Those bad habits have been keeping a lot of equipment that’s newer than they’ve ever had and buying land at prices they’ve never paid.”

That’s created an “extremely heavy draw” on available cash flow for the farm.

“Very few producers out there took the last number of years of prosperity and socked away piles of cash,” said Gerencser. “Most of them reinvested in their business with equipment and land.”

After “tough times” in the late 1990s and early 2000s, producers needed to reinvest in their businesses, he conceded, but “it went a little too far in some cases.”

“It’s got some people painting themselves into a pretty tight corner,” he said.

And for those producers, being ‘asset rich and cash poor’ isn’t going to cut it anymore.

“When you look back over the last two generations, it seems like the mantra has been that farmers are ‘asset rich and cash poor.’ It’s almost worn like a badge of honour,” said Gerencser.

“The mindset has been, ‘Let’s pay down the debt as fast as we can. Let’s build up the equity. Let’s have that big strong balance sheet. We own most of our farm, and we don’t owe a whole lot of money. But jeez it’s hard to operate, and we always have no cash.’

“It’s been a point of pride.”

But heading into this next downward cycle, it’s time for a “gut check,” he said.

“Cash is critically important, and access to cash is going to be the greatest restriction on business operation and profitability in the next few years,” said Gerencser. “Is holding onto that pride in the equity you’ve got more important than being able to operate comfortably over the next few years?”

Historically, credit has been easy to get and interest rates have been low, but producers can’t continue to rely on borrowed money for operating expenses.

“There’s a very real chance that the creditors can and will tighten up their lending policies, making it so that high-risk credit — like for operating — will be much harder to get,” said Gerencser.

“Farms that are relying heavily on financing for operating cash flow are going to be in a real tough time unless they can start to provide their own working capital internally, from operations.”

Right now, paying down debts quicker “isn’t a good business decision” for most farmers.

“What pays the bills — equity or cash?” asked Gerencser. “Equity does not pay bills, so why would you burn up your cash to create some equity? That’s going to make it awfully hard to operate next year when you’re out of cash.

“There’s no need to urgently pay down debt if it’s going to bring a detriment to your cash position.”

Gerencser also recommends holding off on any equipment purchases “unless it’s absolutely necessary.” But there are some exceptions to the rule.

“I’ve got some clients who are making decisions to upgrade equipment, but the upgrade is allowing them to be more efficient on their farm and lower their operating costs, and it’s managing to lower the cash required to service the debt on the equipment,” said Gerencser, adding that the upgrade will save his client around $15,000 a year.

“He’s preserving his cash flow in 2016 and 2017 by another $15,000 a year, on top of the efficiency in operating. It’s not a big number, but every little bit helps.”

Those decisions take “analysis and understanding,” though.

“For too long, decisions have been made based on a hunch or emotion,” said Gerencser.

“Informed decisions need to rule the day going forward. Decisions need to be analyzed and reanalyzed and critically thought out to make sure that they are in the best interest of the farm and meeting the goals of the business.”

The post Producers need to banish bad habits as margins become slimmer appeared first on Alberta Farmer Express.

Only 16 per cent hired outside help for record-keeping, 50 per cent did it themselves and 20 per cent named their spouse as the primary record keeper.

Those findings are probably still true today, says a provincial farm business management specialist.

“There are many reasons why farmers’ financial management skills and literacy have been slower to develop compared to other industries,” said Dean Dyck. “Although financial institutions require up-to-date statements, many farmers’ primary reason for record keeping is for Canada Revenue Agency reporting. Since cash basis accounting provides farmers with significant advantages in managing their tax liabilities, there is little incentive for them to prepare accrual financial statements, a primary management tool in other industries.”

Accrual accounting identifies profitable crop or livestock enterprises and provides direction for future management decisions, he said.

Dyck said a strong farm financial plan should answer three questions: Where am I? Where am I going? and, How do I get there?

“There are two key financial statements that every farm should prepare to answer those questions: a balance sheet and a cash flow,” he said. “A balance sheet will give you the power to manage working capital and debt repayment capacity. Projecting a cash flow budget for 2016 is essential, particularly if you sold off livestock in 2015; lost part of your land base in a rental competition; or paid too much to win that land rental competition. This budget will keep you focused on variable expenses (seed, fertilizer, chemical or feed) as well as fixed costs.”

And if you get stuck or have questions about things such as a balance sheet and cash flow statement, help is only a phone call away, he added.

“If you have any questions on farm financial planning, give us a call at the Ag Info Centre at 310-FARM (3276).”

The post That work you hate pays very well appeared first on Alberta Farmer Express.

That process involves budgeting for family living expenses — a number that may shock you.

“In the last five years, family living costs have increased substantially due to inflation and good farm margins,” said Rick Dehod, a farm financial specialist with the province.

“The average Alberta farm family living costs in 2013 as reported by Statistics Canada were $71,429 before income taxes. Farm families today enjoy the same standard of living as their urban cousins.”

While cash flow projections are critical, especially in times of need, producers don’t have to wait for a crisis to benefit from good cash flow planning, said Dehod.

A properly developed cash flow projection can help a business foresee and prepare for potential shortages. Cash flow management can also help:

• Maintain adequate cash reserves to pay all living costs; make bill payments on time; or invest in expanding the business should an opportunity arise
• Reduce interest costs through managed borrowing
• Increase interest income by transferring surplus funds into interest-bearing accounts temporarily, if appropriate
• Control costs by having the cash available to take advantage of buying inputs at favourable prices
• Improve relations with the bank manager and trade creditors
• Plan for the next crop year

“As family living costs and the farm’s business costs are blended in, a farm business that prepares cash flow projections often learns something about their systems, the dynamics of their business, and the cash demands on their farm,” said Dehod.

They often have other positive outcomes as well.

“For example, you might discover that you need to pay more attention to markets to obtain the right price, or that you need to have a better understanding of your cost of production,” said Dehod. “You may decide you need to take a marketing course so that you can make better decisions to protect or improve your farm’s profit. Or, you may find that you really don’t know what your living costs are, and what effects these living costs have on your working capital position.”

To assist with cash flow planning, Alberta Agriculture has a cash flow analysis tool called Cash Flow Analyzer.

The post The cost of living may be a lot more than you think appeared first on Alberta Farmer Express.

“If you aren’t paying attention to your marketing plan or don’t have one, you may find yourself with a reduced margin,” said provincial financial specialist Rick Dehod.

“If severe weather has affected your farm this year, your yields may be negatively impacted and you may also end up with a reduced margin. If there is a large crop and issues with delivery or shipping, you may find yourself with a reduced cash flow.”

But there are things that can be done to help, he said.

“Start with your current ratio, which is your crop and input inventory (accurately valued) and accounts receivable and cash divided by your accounts receivable, your operating loans, advances and your principal payments on debt coming due within the next year,” said Dehod. “If this ratio is 1.5 to one or greater, you probably can focus on other things for the short term.

“If the ratio is under 1.5 to one, you should probably be concerned about how things will look for the winter. You may want to fine tune your marketing plan and your cash flow management. If the ratio is below one to one, you should be taking steps to make sure your farm survives to the next growing season.”

Also look at debt service requirements.

“This is the total of your principal and interest payments that are due in the coming year, expressed in cost of production per unit.”

Take, for example, a 2,000-acre farm with $600,000 of debt. If the annual repayment of principal is $80,000 per year and the interest is $30,000 (a five per cent interest rate), the total yearly payment is $110,000 — or $55 per acre.

“This number can be used to quickly gauge if your yield/price combination will be enough to pay the input costs and make your payments,” said Dehod.

It’s important to be proactive and keep in regular contact with your lender, he added.

“Lenders consider themselves as partners in your operation and will usually work at maintaining a relationship with you,” he said. “You should view things the same way. As a farm manager, keeping your lenders up to date with what is happening on your farm is very important, especially when things may be tightening up in cash flow or profitability.

“With proper lead time, most lenders will try to work with you to maintain a manageable cash flow and keep your farm moving forward.”

For more information on cash flow management and a grain-marketing plan, go to agriculture.alberta.ca and search ‘farm manager.’

The post When margins are tight, you need to know where you stand appeared first on Alberta Farmer Express.