Farm Horizons, February 2015
How do I survive a financially tight year?
By Myron Oftedahl
With the drop in grain prices during 2014, many farmers are asking how to get through 2015 with grain prices, in many cases, at or below the cost of production.
I wish that I could tell you a single item that will solve the dilemma, but there is no silver bullet.
You will need to take a hard look at your farm’s financials, make some decisions, and then stick to them.
Here are some thoughts about items to look at.
Can you enter into delivery contracts with the basis fixed, so that you are not delivering grain during combining when the basis is at its widest? In other words, try to fix a 25- to 30-cent basis for corn instead of taking the 50-cent or more basis during harvest.
Can you run the equipment that you currently own for another year? Do you need all of the equipment that you own? Do you need a tractor for each piece of equipment? Do you have sufficient acres to justify ownership?
Reducing the fixed costs of ownership can help the bottom line of any business. It typically requires about 400 acres to justify owning a combine, according to most studies that I have seen.
Could you be more efficient with one large piece of equipment, instead of two medium-sized machines?
I remember reading an article that discussed this issue and compared owning two medium/large combines and related semi-trucks to owning one large combine and related semis.
I don’t recall the exact numbers, but the article concluded that the farm was more efficient and showed cost savings operating the one large combine, grain cart, and semis, due to lower operating and ownership costs per acre, as well as the reduced amount of labor required to run the extra machines.
Before you order parts or filters, check to see what you have on the shelf. Use the inventory on hand before purchasing more. Do preventative maintenance in order to prevent breakdowns.
Take advantage of cash discounts as much as possible. If you use a credit card to pay for something, be aware that many businesses will charge an extra 3 percent to process a credit card payment.
If you do use a credit card, pay the full amount before it is due to avoid any interest charges.
Be aware of the balance in your checkbook. Know how many checks you can write before paying service charges or overdraft charges on your account.
Is there an opportunity to refinance some debt at a lower interest rate? A 1 percent reduction of interest rates on a seven-year note of $100,000 is a savings of $575.28 per year.
Control waste, spillage, etc. Be diligent about checking grain bins in order to maintain grain quality. Make sure containers are empty before throwing them away. Return any unused product if possible.
Control family living expenses. This is probably the hardest one for us to reduce or to put the brakes on. It is hard to change what we have gotten used to for family living.
Do you need more than one vacation a year? Do you need the new snowmobile or boat? Could you stay home one more night per month instead of eating out? I have seen some high family living expenses in the Minnesota Farm Management numbers; is it necessary?
Do you need all of the fertilizer that the salesman is selling you? Take a look at the recommendations; there is often a huge difference between the University of Minnesota recommendations and the fertilizer dealer. Often, this is because the dealer is selling you a build program in which you use more fertilizer than is necessary for the crop, and the excess should raise the soil test values.
This is a good theory, and OK to practice when fertilizer prices are low and you have extra dollars to invest for the future, but not when crop budgets are tight with no forgiveness.
A lot of this discussion comes down to being able to separate wants from needs. Does the operation need this expense, or is it a want? Is it necessary for the day-to-day operation of your business?
Develop a capital replacement list and then prioritize this list. Benchmark your farm operation against others to see how you compare. Set goals for areas that could be improved. Be able to say, “No,” to sales pressure. You need to understand and be knowlegable about the item before you agree to purchase it.
You, as the farm manager and owner, will need to make some hard decisions during this year of tight economics if you are going to survive.
Have a very frank discussion with your lender about your plans and cash flow projections. Have a frank discussion with your family about expenses.
Some planning now could limit some painful decisions later. n