Finance Tips for the Full-Time Farmer
As a farmer, it is no surprise that agriculture is volatile. You might make more than you ever thought in one year, and the following margins are so razor thin you aren’t sure you will make it. While this might be the reality of production agriculture, you can take steps to keep your financials in order. Next time you hit a down market, you won’t panic, and when prices are strong, you are prepared to grow your operation.
Finance Tips for Farmers
Keep Close Tabs on your Cost of Production.
This includes operating expenses, like seed, feed, fertilizer, and labor, as well as your overhead costs, like interest, repairs and maintenance, and cash rent. Break them down into expenses per unit, like seed $/acre or feed $/cow, to ensure you meet your benchmarks.
Cash is King in Farming.
You need to keep some cash in the bank; it’s like your emergency fund for your farm. Your lender will call it working capital (current assets minus current liabilities). Use the working capital to gross revenue ratio to monitor. At least 30% if you are a crop farmer and at least 20% if you raise livestock.
Diversify your Operation.
We’ve all heard the age-old adage, “Don’t put all your eggs in one basket.” Don’t rely on a single crop or customer – the market is already volatile enough. Could you raise some cattle on your crop residue? Can you finish a few fat cattle instead of selling them all as calves?
Manage your Risks.
There will always be risks associated with farming, but you can manage that risk. That may sometimes mean you lose out a little when the market peaks, but you won’t lose out when it dips. Buy crop insurance if it is available. Consider contracting and hedging against price changes.
Stay up to Date on USDA and FSA Programs.
The government offers a variety of programs that can help farmers, such as loans, grants, and tax breaks. Occasionally, they will have programs for farmers during extreme market volatility (like the COVID pandemic) and significant weather issues (like drought).
Examine your Life Insurance Policies.
And if you don’t have one, get one. Whole life or term life policies have different benefits. Many whole-life policies contain provisions that allow you to borrow against or deduct premium costs, which can be used for farming expenses. Term life policies are less expensive but don’t have these provisions.
Prepare for Lender Meetings.
Don’t treat your loan officer like your CFO and wait for them to tell you how your farm is doing financially. Before your meeting, be prepared with budgets, balance sheets, and inventories. Ask what financial ratios are most important and calculate them yourself. You should know your likelihood of loan approval before you show up for a meeting.
