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Four Factors of Financial Success for Your Farm

Date: 
Author: 
Brent Kelsey
Educational Opportunities: 
Articles
Interests: 
Grain, Dairy, Swine, Beef, Young, Beginning Farmers, Women in Ag
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To those outside of agriculture, making a profit with our farming operations might seem simple: buy inputs low and sell grain when prices are high. Through my work with clients at Compeer Financial — and from being a farmer myself — I know firsthand how complex operational finances can be. Profitability stems from more than buying low and selling high. Success as a grain producer means understanding your numbers and leveraging best practices and experiences to squeeze the most out of every purchase, process and sale.
 
A common obstacle I’ve seen time again in my work — with young and beginning farmers in particular — is the lack of understanding and failing to make adjustments to the individual elements that comprise a healthy financial picture. 
 
Do you know your break-evens? Do you know your working capital position? And, do you know what your family spends on living costs? Understanding these components of your financial condition may help you rest a little easier at night.
 
  1. Working Capital. Working Capital (WC) = Current Assets – Current Liabilities.
A reasonable working capital value is  between $220 and $250/acre.  An operation with a working capital ratio of 1:1 ($100,000 current assets and $100,000 current liabilities) is likely stressed, as it indicates $0 of working capital per acre farmed.  A WC of at least $220 is desirable in order to be set-up for the next couple of years. In order to grow your operation, you will need two to three times this.
 
  1. Burn Rate. After determining your working capital, calculate your working capital burn rate. That’s the length of time it will take to run out of working capital. If the next year or two projected market prices are such that an operating loss is evident, will you still be able to meet all obligations?
If you have sufficient working capital (i.e. $250/a) you are less stressed and will likely be able to make all obligations over the next couple of years. Conversely, if your working capital position is $0, and if you have another loss year, you may be unable to cover some obligations.
 
For example, let’s say you currently have $100,000 of working capital and you farm 800 acres. You have $125 WC/acre. What if your projected loss is $60,000? Essentially, your working capital burn rate is $75/acre and you will be out of working capital before the end of year two.
 
  1. Family Draws. What is your family living/owner draw from the farm? Can you eliminate unnecessary expenses?
Easier said, than done. I know. When things were good, some operators — and landlords — became accustomed to a little better standard of living. We’ve heard it before, however, there are times in all our lives when we need to each ask ourselves and our family, what are our “Wants” and what are our “Needs?” With the uncertain and volatile agriculture environment, if you are pulling family living expenses from your farm operation, now is the time to evaluate your priorities. Do you need that expensive satellite subscription? Can the new car be put off a couple more years? Is that vacation necessary? Do we really use the RV enough to justify keeping it? We are paying WHAT for our mobile phones? These are just a few things our team hears from clients looking into to cutting living expenses. Although some are small, they all add up.
 
  1. Break Evens. Really understand your overall financial condition and know your operation’s break-evens.
This point is probably the single most important factor to success. If you know your financial health and understand your break-evens, then you will have a better gauge on how your projected year will go and what you might have to adjust. If your break-even is higher than the projected market prices, do you have enough working capital? With your burn rate, is your current working capital enough to sustain you?
 
If, after reducing living and operational expenses, you are still projecting a loss, look to the large farm expenses, such as land rent. You want to be fair, but you also want to remain profitable and competitive. We’ve had a lot of clients successfully negotiate their rents with help from our Margin Manager and benchmarking reports comparing their operations against their peers. Are you competitive? Plug your numbers into Compeer’s Margin Manager to see what your break-evens are and utilize the information to help in your negotiations. 
 
President Dwight D. Eisenhower once said “Farming looks mighty easy when your plow is a pencil, and you're a thousand miles from the corn field.” Here at Compeer we are local. In fact, many of us have a direct relation to the farm, or actually farm ourselves. Never hesitate to ask the Sales or Credit specialists at Compeer what you can do to keep your operation profitable.
 
 
Brent Kelsey is a Senior Credit Officer at Compeer Financial. For more insights from Brent and our other ag experts sign up for our agriculture eNewsletter.
 
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