Extension News

Managing through a Recession: Options for Farm Operators

1/15/2009

AMES, Iowa -- The agricultural sector seems like an island of tranquility in the midst of worldwide financial and business collapses, rising unemployment, record home foreclosure rates and government deficits. Farm producers and managers, who have enjoyed historically high farm net worth values and real U.S. net farm income significantly above 1990s levels, are beginning to see economic conditions influence their business.

Iowa State University Extension agricultural economists have advice for crop producers as they face higher inputs costs and selling prices well below the peaks of 2008. Their advice also holds for livestock producers who have had to endure many months of thin or negative margins. 

“The future is extremely uncertain and managers need to prepare by thinking in terms of contingencies – having plans for a number of possible situations that will be revealed later in the year,” said Robert Jolly. “Farmers and lenders need to think in terms of contingencies – what should be done if conditions worsen, asset values decline or if rural and agricultural lenders start to experience liquidity problems.”

Jolly and William Edwards, another ISU Extension agricultural economist, describe in recent Ag Decision Maker (AgDM) articles what they know about the current financial condition of farmers in Iowa and suggest a few options for managing through some very difficult and uncharted waters.

In his article, Edwards offers a list of possible financial management practices and strategies that could come in handy, including:

Prepare an accurate set of financial statements. Highly variable inventory prices and increasing land values will make this year’s balance sheet look quite different from last year’s.  And for grain farmers, a net income statement for 2008 may be something to share with your lender. 

Prepare a detailed cash flow budget.  Many crop farmers will have a hard time meeting all their cash commitments from sales in 2009.  Higher input costs and rents will increase operating line requirements.  Livestock farmers will need to budget feed purchases carefully

Shop around for inputs.  Depending on when suppliers booked fuel, fertilizer, pesticides and other inputs, prices may vary dramatically. Consider both cost savings and yield effects when applying inputs.  For example, cutting back on nitrogen fertilizer when costs are high makes sense, but only up to a point.

Know your costs of production.  When profitable selling opportunities arise, lock them in.  Watch for opportunities to price crop inputs, feed and feeder livestock, as well.

Document yields for a possible crop insurance or SURE payment.  Many crop producers will receive an insurance indemnity payment due to falling prices in 2008 as well as from damage caused by rain or floods.  Additional payments may be available under the SURE disaster program in the new farm bill.

Increase crop insurance coverage for 2009.  Higher production costs may require higher levels of protection to assure a breakeven level of revenue.

Consider enrolling in ACRE.  Under the new farm bill program, Average Crop Revenue Election, crop producers can substitute a gross revenue protection plan for the current price counter cyclical program, with guarantees based on higher price levels and current yields.

Use flexible lease agreements. Tying cash rents to a formula that takes into account both yields and prices will help protect margins. 

Defer capital purchases and income taxes. When margins are narrower, replacing machinery, putting up new storage bins or bidding on more land may have to wait.  Replacement parts and overhauls are cheaper in the short run.

Compare financing rates and consider refinancing long-term obligations. Federal interest rates are at historic lows. There may be wide differences among agricultural lenders. Marketing loans from the Farm Service Agency also are available for short term financing. Compare possible interest savings to the costs of rewriting the loan.  It may be a good time to convert variable rate loans to a fixed rate.

Keep assets liquid.  If gross revenue is not enough to cover production costs and family living expenses this year, keep funds in savings or short-term investments rather than assets that would be hard to convert to cash. Use equity in land, livestock and equipment. If cash reserves aren’t enough, talk to your lender about borrowing against fixed assets, with a multi-year repayment plan.

Agriculture has always been a cyclical industry.  A good financial manager learns to balance the profits and losses to ensure long-term survival.  Financial management tools to support the practices and strategies mentioned in this article are linked in the January Ag Decision Maker article at www.extension.iastate.edu/AgDM/crops/outlook/edwfeb09.html .

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Contacts :

William Edwards, Economics, (515) 294-6161, wedwards@iastate.edu

Robert Jolly, Economics, (515) 294-6267, rjolly@iastate.edu

Willy Klein, Extension Communications and External Relations, (515) 294-0662, wklein@iastate.edu