Road map to resilience
By DARCY DOUGHERTY MAULSBY
ANKENY – Even when times are tough, someone always manages to make money. It was true during the Great Depression, and it’s still true as agriculture slogs through an extended downturn in the farm economy.
“There are people making money in agriculture today,” said Angie Treptow, regional vice president, east-central Iowa, for Farm Credit Services of America (FCS). “I’m going to give you the play book of how they do it.”
Within FCS’s operating line of credit portfolio, 71 percent have positive earnings, added Treptow, who noted that FCS has more than 57,000 customers in Iowa, Nebraska, South Dakota and Wyoming.
“Making money doesn’t necessarily mean you’re making enough to pay the bills, however,” said Treptow, who spoke at the Iowa Women in Agriculture’s 13th annual conference, which was held at the FFA Enrichment Center in Ankeny on August 1. “You have to look at things holistically.”
In Treptow’s experience, successful grain producers have positive working capital and short-term risk-bearing ability. They pursue additional income sources, both on-farm and off-farm.
“They also have solid financial acumen, including good recordkeeping and understand the financial impacts of their business decisions,” she said.
Successful grain producers understand and proactively address family living costs. Even something as basic as buying a car requires some careful thinking at times like this.
“You need to look at the long-term,” she said.
This is especially true with high-dollar purchases like farm land.
“If an 80-acre farm comes up for sale, or another 40 acres comes up for rent, what will your cash flow look like if you buy or rent?” said Treptow, who advises clients to proactively negotiate cash rent. “With any of these options, you need to make business decisions based on cash flow and costs of the entire operation.”
Sometimes this means restructuring the balance sheet to provide maximum repayment flexibility. Think in terms of positive working capital and short-term risk bearing ability.
“This is the top part of your balance sheet,” she said. “It’s your buffer to weather tough times.”
In some cases, better cash flow might mean selling under-performing or non-performing assets. In other cases, it might mean investing in technology, if it makes financial sense. Some dairy operations, for example, are adding robotic milkers to become more efficient and save on labor costs.
“Robots aren’t for everyone, but they make financial sense for some operations,” she said.
It also pays to develop a specific marketing plan.
“Most operations can have financial success with $4 corn and above,” Treptow said. “We want you to take a position in the market, and we want you to be prepared, whether the market goes higher or lower.”
The key is to focus on maximizing profits versus maximizing yields or minimizing costs. There are no cookie-cutter answers that fit every farm. Investing in a new grain bin to help take advantage of carry in the market might make sense for one producer, but it might be a poor decision for another producer, depending on each one’s financial position. “If your business won’t cash flow the purchase, you’d better think twice,” Treptow said. “Find a trusted financial advisor to help you think through these kinds of decisions.”
Focus on working capital
Successful producers focus on getting better, not just getting bigger. In her 27 years in the ag finance world, Treptow can remember when “bigger is better” was the mantra of many producers. “Bigger isn’t always better, though,” she added. “It comes with more headaches, too.”
Also, beware of putting too much faith in equity, or net worth. Equity is an estimate of wealth, based on total assets minus total liabilities. While it’s an estimate of wealth, it’s a theoretical number on a balance sheet.
“Most balance sheet equity positions are overstated,” said Treptow, who noted that most equity positions do not include commissions, deferred tax liabilities or capital gains. She shared the story of the time she bought AT&T stock and was thrilled when shares rose $3. Then she realized that it really didn’t mean much, since she wasn’t prepared to sell the stock.
There are only two ways to access equity: borrow against it, or sell the asset.
“Equity is not cash,” she said. “It does not solve cash-flow issues, and it does not repay loans.”
Do make working capital your highest priority.
“Working capital is your buffer to handle financial ups and downs, including financial obligations you didn’t see coming,” said Treptow, who noted the working capital is simply current assets minus current liabilities. “If you want to be successful in this business, you have to have it.”
The ag industry has seen troubling declines in working capital in the past five to six years, Treptow added. To strengthen this financial buffer, options include renegotiating cash rents, cutting input costs, reducing family living expenses, diversifying income streams, selling under-performing or non-performing assets, and limiting capital spending.
Always look to get better
Planning for financial success also means realizing that big yields are a blessing, not a given. Figure in normal yields when developing a business plan, Treptow said. Also, remain focused on continuous improvement.
The agricultural industry continues to reward producers who increase their business, financial and marketing skills. The goal is always to have a high revenue/low cost operation. It’s a plus that Iowa remains one of the most productive, sustainable, viable agricultural areas in the world.
“There will be financially successful farmers in 2019,” said Treptow, who noted the interest-rate environment continues to be positive for agriculture. “As you assess what 2020 will look like for you, seek out advisors who can provide the guidance to help you better understand your financial position so you have the confidence to take advantage of opportunities that come along.”
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