Overcoming the cash flow crunch
The cost-price squeeze for many farmers could mean tight crop profit margins and cash flow constraints. With a great deal of crop market price uncertainty, expect cash flow management to be a bigger challenge this fall and winter. Many farmers avoided cash flow concerns by pre-harvest marketing a portion of their 2018 crops while others may self-finance their farming operation. Expect some challenges ahead for farms with debt and holding large quantities of unpriced old crop and soon new crop bushels. These farms likely face a cash flow crunch and interest charges accrue.
The new Market Facilitation Program (MFP) authorized under the Commodity Credit Corporation (CCC) and administered by the USDA Farm Service Agency (FSA) will provide funds sometime this fall. Do not expect those payments to be large enough to provide a large benefit if cash flow problems exist.
Start to overcome fall cash flow challenges by identifying what and when bills and loan payments need to be made. One example is crop insurance premiums are due October 1 to avoid interest charges of up to 15 percent annual percentage rate. For other bills, perhaps a partial payment can be made without triggering additional penalties and interest charges. Does your farm operating loan have room to advance funds until crop sales are made?
If you know cash flow is already going to be a problem, communicate early with your creditors. Many primary ag lenders spent the past few winters restructuring existing farm loans to stretch out principal payments and free up depleted working capital. These same lenders might be reluctant to restructure loans any time soon without a commitment from the borrower to improve their cash flow management to meet existing debt obligations. Farms without access to typical operating loans should use caution before advancing family living and farm related expenses on credit cards or higher interest-bearing debt.
Focus early on understanding other crop marketing strategies and tools rather than just storing bushels unpriced. With more farms facing cash flow constraints this fall, consider the delivery of bushels at harvest. Communicate with your grain merchandiser now regarding how various marketing tools could be used to shore up cash flow needs and avoid additional storage charges.
You can still benefit by being “long deferred futures” using a basis contract and/or “purchase call options” with a minimum price contract. Consider delivering bushels to a processor where better cash prices exist reflecting basis. This will be especially true as harvest wraps up and basis begins to improve.
For bushels you plan to store, the USDA FSA offers a low-interest, 9-month non-recourse marketing loan on harvested grain. On-farm stored bushels will need to be measured and commercially stored grain be placed under a warehouse receipt. This marketing loan amount is limited to your county loan rates, which in Iowa are typically below the national loan rates of $1.95 per bushel for corn and $5 per bushel for soybeans, respectively. Thus, the marketing loan program is not a marketing strategy for cash grain, just access to cheaper interest rates for up to nine months.
It could be well into the winter or spring months for corn and soybean futures prices to rebound along with significant basis improvement. Overcoming the fixed costs of commercial drying, shrink and storage costs might prove challenging. Adequate commercial storage space should be readily available at harvest, but basis improvement may be limited, especially for soybeans. Limitations of commercial storage costs and accruing interest on existing debt along with any short-term basis improvement could negate potential for a positive net return to grain ownership.
Consider the use of the ISU Ag Decision Maker web page on crop marketing and storage. This site contains information files, decision tools, voiced media and related training material.
Steven D. Johnson, farm and ag business management specialist, 515-957-5790, firstname.lastname@example.org