Today’s High Input Costs Impact Cash Flow

Managing a farm during normal times can be tricky. Managing through economic upheaval, such as what we’ve seen during the COVID-19 pandemic, requires strong risk management and cash flow strategies.

With input costs going sky high this year – in many cases doubling – farmers are investing a lot more money up front to produce their crops than during normal times. Corn seed has gone up between 40% and 100%, fertilizer has increased by as much as 150%, and fuel prices have doubled from one year ago. So, a farmer who had $1 million of input costs a year ago may be looking at $2 million this year.

Has that farmer adjusted his financing needs to cover that, or is he using current year cash flow to cover it? Some farm owners may be penciling out their plans for next year and wondering how they’re going to do it.

Farming is a highly leveraged business, and never more so than this year. The prices are there to help manage the risk. If you can lock in, you can show a profit. But delivering the crop is the challenge.

Manage Risk and Finances

Planning, budgeting, penciling everything out, being organized, and having a good relationship with your banker are critically important factors in farm success right now. For your banker, the quality of information you can provide, and the immediacy of your communication are important factors in getting additional lines of credit you may need.

The benefit of having detailed up-to-the-minute data about your finances and your farm operations can’t be overstated. One local farm owner recently learned that a neighbor was selling 1,500 acres that were well located to fit into his strategic plan for expansion. He learned about it at 10 a.m. and the land was to be auctioned that afternoon. Because this farm owner actively manages his farm and his finances, he was able to put together – that day – the data that his banker would need. By the time the land went up for auction that afternoon, the farmer had a $10 million loan and was able to purchase the land.

Are you organized and informed enough to be able to take advantage of an opportunity for your operations that quickly? Do you have that strong a handle on your financial data, and that kind of rapport with your banker? There’s no reason you can’t. The opportunity this farmer saw was huge for him and has the potential to make him a much bigger player in his marketplace.

Active financial management, cash flow management and realistic revenue projections based on live data and price commitments can help most farmers survive and even thrive during this unprecedented period of high input costs. This is not likely to be a temporary issue. It could be years before we see a turnaround in logistics and supply chain disruptions, and even then, prices may not return to what we think of as “normal.” Now is the time to get a handle on your farm management.

For smaller farm owners, the need for strong management is even more acute. Most larger players have more clout in the marketplace and have little trouble getting the fertilizer and price commitments they need. But a smaller farm owner doesn’t have that kind of leverage and may struggle to find needed product.

The Road Forward

Here are a few recommendations that may help you get on the road to better farm management:

  • Consider getting into purchasing groups. You may already be a member of a co-op, but in some cases, co-ops don’t give you the purchasing power you need. Join associations or other groups that can offer joint negotiation for fuel, equipment, seed, and other inputs.
  • Manage your farm using a platform like AgriBuilder so you know exactly where you stand, where you’re going and how to pivot during the year as needed. When input costs go up, your risk goes up and you’ve got more money on the table to lose. Even if you’ve already put in a crop, the market can change dramatically. Do you ride it out or cut your losses? The data you can get from AgriBuilder can help you make better decisions that will impact your cash flow and profitability.
  • Manage your farm financially, not just for production. Farming shouldn’t be a gamble, it’s about risk management. Right now, you can sell next July’s wheat for $7 a bushel if you lock in your price to guard against downside risk. That’s a good price, but some won’t lock in any of their crop hoping it will go even higher. But what if it drops to $6 or even lower? Today, farming without managing risk is like taking your money to Las Vegas. Farm management platforms like AgriBuilder can help you manage your risk, and the cost of the software is not out of reach even for the small or medium-size farmer. The software with support is as little as $3,000 per year.
  • Be able to quickly predict the impact equipment purchases will have on the cash flow and profitability of your farming operations. Look at how the equipment you’re buying will impact your future operations from a financial standpoint. You may have the money to spend $500,000 on a combine, but how will that affect your future cash flow? Is your decision to purchase based on improved profitability or simply a tax savings strategy? Buying a new combine provides a nice tax break, but it may not be the best strategic decision if it ties up your cash flow.

Risk management and good strategic planning go hand in hand. Contact your Adams Brown advisor to discuss how you can leverage the advantages and data you already have to help your farm operations thrive in 2022.