By Jason Fewell
Originally published by Dakota Farmer at farmprogress.com
In today’s farming environment we hear a great deal about farm financial stress. Managing stress can be difficult. Everyone handles stress differently. Some people work harder, some play harder, some turn to alcohol or drugs, some let fate dictate their day-to-day activities. Each person needs to find something that works for them to handle stress.
As a farm management instructor, I often talk about things that stress the farmers I work with. Most of the time it revolves around finances. Stress-proofing your farm or ranch is almost impossible but planning ahead to minimize stress when prices are low and expenses are high can make life easier. Farming and ranching are cyclical businesses. We learn from experience and getting through difficult times can hopefully teach us what we need to do when things improve and before the next downturn.
Having a good working capital position is the best way to keep your operation resilient in hard times. The farmers and ranchers that get through difficult times with the least amount of stress have strong working capital built up during good times. The difficult financial situation many operations are experiencing during this downturn that began in 2023 makes building working capital nearly impossible. However, having a plan and making good decisions can set up the operation for success before the next downturn.
One of the most important things to know is cost of production. Keep track of direct and indirect costs per crop or livestock unit. Knowing this will help improve marketing and profitability. Profits turn into working capital. Soil testing is important so that you aren’t over- or under-applying crop nutrients, both of which can negatively impact profits. Likewise, apply chemicals in a cost-efficient way. Monitor weeds, diseases, insects, etc. in your fields and apply crop protection products with profits in mind. Discuss this with your crop scout and agronomist.
Evaluate capital purchases carefully. It is easy to make large capital purchases when profits are high. However, when prices fall, payments on equipment or land can become difficult to fit into a cash flow. If you are looking at making capital purchases when times are good and think it’s easy to pay for, you might want to stop and think about tougher times and reevaluate your decision.
Stress-test your cash flow budget. What if there is a 10% increase in expenses? What if there is a 15% drop in crop prices and you’re not hedged? What if interest rates double? What if yields fall 20% due to some weather-related event? Evaluate what happens to your cost of production per bushel, cwt., etc. and your income available for family living and debt service. Planning for these decreases even when prices are good and basing your decisions off of lower returns can improve your financial position when returns do decrease due to something out of your control.
Difficult financial times might require taking an off-farm job. Maybe this is something that you continue to do even when prices improve. If you are able to get all the farm work done, an off farm job provides extra income for family living expenses and allows farm income to pay for farm expenses. It can also help build working capital.
Evaluate family living expenses. Can the farm sustain your lifestyle? If not, figure out what you can cut. Saving some money on living expenses can help the working capital position to some degree.
Planning ahead for difficult times can make your operation resilient when the downturns come. Study your operation during these difficult times to see what you are forced to change and maybe continue these practices after the return of more profitable prices. Then think about the possibility of lower returns even when everything seems to be going right so you can handle the tougher times.
The North Dakota Farm Management Education Program provides lifelong learning opportunities in economic and financial management for persons involved in the farming and ranching business. Visit ndfarmmanagement.com, Facebook @NDFarmManagementEducation, or contact Madison Bodine, State Supervisor for Farm Management Education, at mbodine@nd.gov or 701-328-4567 for more information. The ND Farm Management Education Program is sponsored by the North Dakota Department of Agriculture.