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Jim Meade / Iowa City
Senior Advisor

Spend Savings Or Cut Back On Inputs?

The U/I thinks about whether farmers with some cash in the sock are going to save it and cut back on inputs, for example, reduce rents, or whether they'll spend money to keep at the same level of operation even if it means losing money.

Spending up may mean losing money in 2016.  Cutting back may mean one loses land and misses a chance of bigger profits when the farm economy picks up.

 

http://farmdocdaily.illinois.edu/2015/06/working-capital-preserve-it-or-use-it.html

 

"Implications

Many farms have significant reserves of working capital that were built from 2006 to 2012. Commodity prices have decreased from 2010-12 levels. Lower commodity prices are now projected for the foreseeable future. Lower commodity prices and high costs lead to projections of low or negative cash flows for the next several years. These low return levels will cause negative cash flows on many farms. Farmers then may choose to use working capital in meeting these cash shortfalls, leading to reductions in working capital.

Several points about the current situation:
Many farms will be able to withstand low and negative cash flows by using working capital and other financial resources built in the past several years.
Some farmers do not have as much working capital as indicated by the above averages. The above Figures show average levels of many farms. There are some farms that have smaller reserves. Farms with smaller reserves tend to be operated by younger farmers beginning in farming. Also, those farmers who pursued aggressive growth strategies in the past several years using high cash rents to acquire control of farmland may have low levels of working capital.
For farms with significant amounts of working capital, "easy" decisions will be to continue operations without reducing cash flow. At this point, projections suggest low to negative cash flows for 2015 and the next several years. If commodity prices do not increase, costs and other cash flows will need to be reduced at some point. Reduced cash flows will come from 1) reductions in seed, fertilizer, and chemical costs, 2) reductions in cash rents, 3) reductions in machinery purchases, and 4) reductions in withdrawals from farming operations for family living.
Preserving working capital now may be a prudent strategy. As working capital is reduced, a farm's abilities to meet potential future financial difficulties also are reduced. Where this tradeoff likely will be faced most directly is when making cash rent decisions for 2016. Some farms may have farms with high cash rents, leading to projections of negative returns in 2016 if cash rents are not reduced. If landowners are not willing to lower cash rents, some farmers may be in the position where renting the farm is projected to be a financial drain in 2016, leading to an erosion of working capital. Not renting that farm may be the best decision based solely on 2016 returns. However, all possibility of gaining positive returns after 2016 most likely will be foregone if the farm is not rented in 2016. These rental decisions will be very difficult.

Summary

Many farmers built working capital in recent years. Now decisions about the use of that working capital need to be made.

Reference

Schnitkey, G. "Farmland Returns in 2015." farmdoc daily (5):87, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, May 12, 2015."

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29 Replies
BA Deere
Honored Advisor

Re: Spend Savings Or Cut Back On Inputs?

With the talk of things being tight and some farmers being denied bank financing, I thought there would be some beans on beans raised and inputs cut.  But that isn`t what`s been seen around here, zero beans planted into bean stubble and actually quite a bit of corn on corn.  The crop has the best stand that I ever seen...I swear the seed must`ve had 110% germination  🙂   And looks to be lacking nothing, weedfree and good color, so if someone skimped, you sure don`t see it.  This spring there was still land in the area that rented for +$300, there was tile being put in.

 

"I don`t know how they do it?" is a common theme among neighborhood gossip...and I see what is meant by that, because up to 2007 everyone was living off LDPs and direct payments, how that would build a "war chest" I don`t know and many missed that first year of the boom in the commodity cycle having had forward contracted before it ignited.

 

Yet there seemed to be the money to tile, buy $13,000 land, new paint and all the do-hickies to plant straight and turn the seed off on diagonal end rows. Land that remained on the market for awhile at $2,000/acre in 2003, went like hot cakes at 6 times that amount 10 years later, yet some how after just a 5 year commodity boom we are to believe that there is a significant amount of farmers with a "war chest"?   They weren`t exactly living frugally.  All that machinery bought to delay income tax, is now having the payments made with for some after tax dollars earned on land yielding below cost of production grain prices. 

 

My best guess is there was some "hocking of wedding rings" to give this year "one more chance" if that doesn`t pay off, I guess like Warren Buffet says we`ll find out whose been swimming in the buff. 

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Kay/NC
Honored Advisor

Re: Spend Savings Or Cut Back On Inputs?

Well, let's dust off that old crystal ball! If you truly believe commodity prices have great upside potential after 2016, then I guess throwing good money after bad makes sense.

There are so few other directions to turn. Stock market over aluation is not just a rumor...correction is somewhere on the horizon. Savings interest rates are nonexistent. Our realtor even warns me that rental houses are oversaturated right now...so many people having invested in them post 2008.

Good time to have no debt, and a poor time to take on more of it. Maybe the surest way to make money in this scenario is to rent out your land to others?
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buckfarmer
Senior Contributor

Re: Spend Savings Or Cut Back On Inputs?

I've done a little of both. No tile this year. No "new" machinery for last couple years. Spent some money on repairs I've been putting off. Cut back on some chemical expenses. Spent some extra money on lime. Kept fertilizer rates were they need to be. Wish I would have shopped around for less expensive seed.
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dennymal
Veteran Contributor

Re: Spend Savings Or Cut Back On Inputs?

My strategy on my higher priced rents is just try and hold my money together and let the more reasonable rents, owned land pay the way. If a person gives up land base it is hard to get it back. It is pretty much a given we will get a very healthy check from  county arc this fall and probably the fall of 2016 too. I am fortunate I can let a farm go and not impact my operation to much, but for the producer that is a little more leveraged I would start now getting prepared with a plan to show the banker this late summer. I would use 3 scenarios based on yields and diferent price scenarios. Personally I am not willing to give up land base just yet . I feel theirs ways to cut and not impact the bottom line. Then their is always the government wild-card. If the things get to bad dont you think the bankers association lobbyists who spent heavily to get this farm bill passed will just stand by and let farmers go broke.

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Kay/NC
Honored Advisor

Re: Spend Savings Or Cut Back On Inputs?

Bankers would be all too happy to see land go to foreclosure. It is one of few assets that will not go to hell in a handbasket, when the dollar does.
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k-289
Senior Advisor

Re: Spend Savings Or Cut Back On Inputs?

It will take more than 1 crop year to settle things out - leveraging one's sanity to be in style and keep up with the Jones might get a little more attention ---

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Kay/NC
Honored Advisor

Re: Spend Savings Or Cut Back On Inputs?

There is a part of me that wants to say this, and a part that doesn't...so, I am going to try to say it tactfully. Might be hard to get it right.

I am really worried about the social toll the reversal of fortunes in farming is going to affect families. Your mention " the Joneses". The problem now is not so much the folks next door...in farming country, we all pretty much row along in the same beat-up boat most of the time.

Now, it isn't so much seeing your neighbors do better ( or at least bigger, newer, shineir), it is the permeating media coverage of the lives of the rich and famous. The ease and expensiveness of their lives is a glaring counterpoint to how most Americans live.

The relatively easy money in agriculture the last few years has given the impression that things had changed. Now, the hard, cold facts are dawning on the horizon. We old, gray-hairs are accustomed to ut, but it has got to be tough on the young bucks and their brides.

It's going to be hard to reduce expectations, maybe even impossible to carry off debts made in better days. There is bound to be collateral damage and fallout.

Even parents who may have thought there was room for a kid to come in might find space in the cashflow too tight to accommodate that. I cannot imagine how difficult it will be for them.

We all have to start thinking more creatively, while living more conservatively. Heading out to hie some garden now....
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dennymal
Veteran Contributor

Re: Spend Savings Or Cut Back On Inputs?

You brought up a good point about operations bringing in another son/daughter the last few years because of the tremendous profits. There are going to be some operations that get financially stressed. However their are opportunities for extra income. Integrators are still looking for places to put up finishing buildings for hogs. Their very well could be more oppotunities on renting more ground. Then their is like Ramsey said on the radio the other day when the farmer called in and said he was losing money raising corn-Ramsey said you might want to get a partime job. A lot of truth to that -grain farming isn't the labor it once was.

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Kay/NC
Honored Advisor

Re: Spend Savings Or Cut Back On Inputs?

Those finishers will not cashflow, at current construction costs. At best, they will service debt at current interest rates, perhaps offset some fertilizer costs.

Dave said rxactly what I remember most from that PBS series, " The Farmer's Wife", many years ago. When the lender told the family that their continuing in farming was boiling down to $100 shortage, the husband cracked, "I could've made that on an afternoon, working in town."

When the banker heard that basically smartass remark, the answer was, " Well, maybe you should have...."

Sort of puts it all out there, doesn't it? We have just traded one demon for another one. DCP/ ARC, the whole alphabet soup...it's just farming the programs, on a much larger bottom line that all goes to the big corps, now. The more things change, the more they stay the same.
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