Looking to 2022: Can You Weather the Financial Storm?
Few things capture the attention of agricultural producers like the weather. Farmers and ranchers often check the forecast multiple times a day in an attempt to stay ahead of any chances of inclement conditions. Wind, precipitation, and extreme temperatures can have significant effects on the health of animals and crops alike, so it is important to keep property well-maintained and have sufficient emergency supplies on hand. If they look outside and see it pouring down rain, sleet, or snow, it is already too late. Coincidentally, forecasting isn’t just for the weather. Producers must have a clear picture of the financial and organizational makeup of their own operation in order to prepare for the figurative storms that inevitably come their way. Unfortunately, far too often farmers fearing a financial storm refuse to even look at a forecast, much less do the hard work necessary to prepare for the storm, leaving them unprepared and scrambling when the inevitable, foreseeable, and even manageable financial storm breaks.
A Storm’s A-Brewin’
Looking forward to 2022, there is a significant storm looming. The events of 2020 left things off-kilter, to say the least, and most of the nation’s industries have struggled to recover. Despite crop prices being relatively good through 2021, supply chains across all segments of agriculture have shown their weaknesses, and there is a good chance that those infirmities will continue well into the next year and create a less than favorable market. Natural gas has already doubled in price due to low supply, which, coupled with several other global factors, has led to a significant increase in the price of fertilizer. The Environmental Protection Agency’s further regulation of pesticides has created a shortage, and weather-related issues have left herbicides in short supply. Unfortunately, physical shortages aren’t the only problem.
From ports to highways, suppliers and producers are struggling to get agricultural inputs and outputs from one place to another. Freight containers full of imported goods are stuck on ships behind marine terminal backlogs awaiting payment of dramatically increased shipping costs and surcharges. Even if the freight that does make it to land, it still faces significant delay in light of the extreme shortage of drivers to truck the goods to infinite destinations across the country. Producers are certainly aware that this storm could turn disastrous at any time, but the trick is to react appropriately so that the industry doesn’t completely collapse.
Batten Down the Hatches
In order to best deal with the continuing supply chain issues, producers must be fully aware of the economic status of their own individual operations and be willing to implement changes in response to their findings. Cash flow projections are one useful tool in assessing the ability of an operation to remain afloat. After considering plans for livestock and crop production for the upcoming year, they forecast the expected cash coming into the business, in the form of income from operations, gains from any expected sales of assets, and any non-farm income that is used to pay farm bills, as well as cash leaving the farm business. The cash flow budget also takes into account any new borrowing that may be taken on during the course of the designated period. The final outcome of those pluses and minuses provides a tentative chronology of when cash may run low for the operation.
In the event that a producer discovers that their cash flow will likely run short in the course of the following year, adjustments must be made to their business plan. Efforts to “stretch” the cash flow, either by reducing outflows or increasing inflows of cash, are best implemented long before the cash runs low because at that point, the tornado is already here. Producers looking to reduce outflows of cash might explore options like selling less productive assets, implementing new marketing strategies or timelines, shifting to raising a different product, or adding on custom work for other producers utilizing their own farm machinery. On the other side of that same coin, producers might be able to decrease outflows of cash by increasing the efficiency of their operation, entering into joint ownership agreements for farm machinery, leasing that machinery instead of owning it, or renegotiating or canceling cash rent leases for property. If landlords are willing to shift a previously cash based rental agreement to a crop-share arrangement, producers would lessen their risk of facing negative cash flows in the event that yields were less than expected.
Beyond adjustments directly related to cash in and cash out, producers should be open to implementing management changes that may translate to keeping their cash flows above water. For those increasingly expensive chemical treatments that are in short supply, it has never been more important to apply them precisely as the label indicates, both in relation to timing and rate of application, and to choose the appropriate crop for the land. For animal agriculture, feed management that provides adequate nutrition, potentially even utilizing less-expensive components while reducing waste, can maximize the return on investment when the products of those animals are marketed. Health protocols, including vaccination and physical monitoring of herd health, aimed at prevention and early detection of illness can also translate to more dollars coming in than going out.
Dealing with a storm of this magnitude also provides opportunity for community. If help is needed in generating or interpreting cash flow budgets, state extension and outreach departments can get producers pointed in the right direction. Agronomists and suppliers can educate producers on best practices, and neighbors can work together to purchase inputs in bulk or hire laborers to work for multiple operations at a more competitive rate. The opportunity for creativity in adjustments to stretch cash flow are immense. Ag & Business Legal Strategies stands ready to help farmers analyze the overall financial health of their operations and maximize profitability while minimizing risk.
No Matter What (Financial) Storms May Come
Regardless of whether the current storm continues to develop or gives way to sunny skies, agricultural producers must not lose sight of the forecast. They should remain attuned to the status of their own operation and continue to explore all options available to ensure that it can weather the storm. Although completing cash flows and projections before heading into 2022 is exceedingly important, it is just as important to continue “checking the forecast” of their agricultural operation throughout the year. This is certainly not the time to just ignore the numbers and hope for the best. If you’re a farmer, Ag & Business Legal Strategies can help you, your family, or your neighbors prepare financial forecasts and brace for upcoming financial storms. If you work for farmers, Ag & Business Legal Strategies can help your clients deal prepare for and deal with financial storms. Don’t be caught unprepared for a storm, get help while it’s still over the horizon.