Communication is key when cash flow is tight
Cash flow management is becoming even more critical in row crop agriculture. While most lenders like to emphasize strong balance sheets, it’s the ability to generate cash that pays the bills. Some farmers did a good job of forward contracting 2017 new crop bushels, hedging or buying put options and will avoid many cash flow concerns this late fall and winter. However, those farms holding large quantities of unpriced crops could see cash flow challenges and may want to focus on understanding other marketing strategies and tools rather than storing bushels unpriced.
Consider making cash sales of corn and soybeans, or delivering to a processor where better cash prices reflecting basis exist—do this as harvest wraps up and basis begins to improve. While basis should remain abnormally wide for December, most of the basis improvement for the winter months occur between mid-November and the first week of January.
Don’t wait too long to talk to your lender
If you know your cash flow is already going to be a problem, communicate early with your lender. Many lenders spent the past couple of winters restructuring existing farm debt to stretch out principal payments and free up depleted working capital. These same lenders could be reluctant to restructure loans anytime soon without commitment from the borrower to improve their cash flow management to meet existing debt obligations.
Lenders more cautious on loaning money
Most cash flow problems will appear by late December and January. Expect some lenders to require the use of the USDA Farm Service Agency’s (FSA) guaranteed loan program before advancing additional funds. Completing paperwork and getting necessary loan guarantee approval could take several months. Farms without access to typical farm operating loans should use caution before advancing family living and farm expenses on credit cards or higher interest-bearing debt.
FSA offers a low-interest, nine-month non-recourse marketing loan on harvested grain, but requires that the on-farm stored bushels be measured or the commercially-stored grain is under warehouse receipt. This marketing loan is limited to the county loan rates, which in Iowa are below the national loan rates of $1.95 per bushel for corn and $5 per bushel for soybeans. Thus, the marketing loan program is not a marketing strategy - just access to cheaper interest for up to nine months.
Shop around for better cash price bids
It could take all winter and well into spring for corn futures prices to rebound along with significant basis improvement. Overcoming the higher costs of commercial drying, shrink and storage might not be realized in addition to the wider basis at a commercial storage facilities. The opportunity for better soybean cash prices could occur this winter should production concerns in South America emerge as they did each of the past two years.
Perhaps the greatest benefit of storing on-farm besides harvest efficiency is that it allows the farmer more time and improved chances to shop around for better cash prices reflected in basis. This will likely be true of processor bids, but not necessarily local elevators and co-op bids.
Consider delivering bushels in December
With more farms facing cash flow constraints this fall, consider the delivery of bushels in December. By communicating with your grain merchandiser in advance, you can still “stay long in the deferred futures” using a basis contract or a minimum price contract.
Much of the actual cash price of the grain will be received upon delivery. Thus, you generate needed cash flow and eliminate storage costs, basis risk and accrued interest. You still have futures price risk in those deferred contract month - likely May or July 2018 futures. You’ll need to work with your grain merchandiser to "short futures" before that futures contract goes into delivery in late April or late June.
With large global ending stocks for corn, soybeans and even wheat hanging over the markets, expect this next year to bring continued struggles to manage production, financial and market price risks. The cost-price squeeze for many farm operations means tight crop profit margins and cash flow constraints.
Steven D. Johnson, farm and ag business management specialist, 515-957-5790, firstname.lastname@example.org