Market News & Headlines >> Katie's Blog: Make a Resolution to Manage Cash flow in 2018
By Katie Hancock
Input costs are steady, if not higher for 2018, and lenders are cautious about handing out additional operating funds. Regardless of profit or loss, producers are handling less cash in this down cycle. We at Brock Associates want to maximize commodity prices, yet it’s up to the producer to be creative in managing cash flow for 2018. Here are a few ideas:
Figure crop expenditures. Many producers are telling me they’re increasing soybean acres in 2018. While that makes me anxious to lock in soybean prices, it’s also a smart strategy to reduce up front expenses. The primary reason is that marginal ground in my area doesn’t grow enough corn. Another is that corn takes more investment up front. A couple hundred dollars per acre doesn’t seem like much until you figure it on a thousand acres.
Look at leasing versus buying. I’m preaching to the choir when I say equipment is expensive. Tying up cash in needed machinery can take a toll on operating money as well as the balance sheet. In the long run, it may be better to buy, but if the goal is to ride out the storm, leasing may be a great way to delay full payment. There may also be a way to buy while financing through the company to reduce up-front cash.
Sell unproductive assets. While it seems obvious to sell machinery that isn’t used regularly, there’s nothing wrong with selling real estate too. The hardest part is letting go of the emotional tie and the embarrassment of selling. Unfortunately, a farm that cash flowed in the good times may not cash flow today. I recommend a look at the yearly payment with interest in comparison to what rent would be. Sometimes the interest itself is less than rent, but the principal payment exceeds what’s realistic to cash flow. If you can’t afford to lose acres, consider a buyer that’s willing to let you lease the property after the sale. Unique strategies are available, but they don’t happen without asking.
Consider lower financing options. Suppliers and elevators are offering delayed payment options for buying crop inputs and specialty grain contracts. Typically, it involves paperwork and a purchase or delivery commitment with that company. Be mindful that some things are too good to be true. Sometimes, the interest rate or up-front fee can be zero, yet the product price is higher than a competitor. Be sure you’re not being suckered into spending more in the long run before committing.
Sell crops earlier than usual. Storing grain may pay, but if you can’t pay the bills on time, the end result could be more expensive. There are ways to use a brokerage account to capture gains in the futures market against grain that is sold and paid—if you feel the market is at a low. Return to storage may be sacrificed with such a strategy, but renting storage to a neighbor could help cover the investment. Or simply store for a shorter period of time. For example, if you typically store through the summer, consider selling in the winter. Another option is a CCC loan, though these don’t lend on the full value of the grain in storage.
Work with a trusted neighbor. You may have ways to share equipment and labor that haven’t been considered. Trading work may also be an option where little cash is exchanged. Sometimes, neighbors are willing to rent a piece of equipment to another, which is a good way to avoid buying for full price.
At the end of the day, ag businesses and producers are in a similar situation. Some are in better shape than others, but you’re not alone in the downturn of commodity prices. This is a time to be more creative. It never hurts to ask for a unique arrangement. Cash is king and it’s a wise resolution to protect it however you can in 2018.