SW Financial Literacy
This past week I met with 7 operations in 3 days, where we updated and reviewed financials while discussing the upcoming year.
Meeting with several farmers back-to-back makes it easy to identify trends in their beliefs for the upcoming year and financial positions. There becomes a bit of overlap it topics brought up which is great, because you can share (anonymously) the opinions of others in your next discussion.
You are now my 8th renewal appointment in 4 days. Although this is a 1-sided conversation for now, feel free to reach out or comment below to share if you agree or disagree. Here is what we discussed:
Interest Rates
While there have been expectations in Wall Street that we see 3 rate decreases in 2024, I’m not buying it. Wall Street was calling for decreases in 2023 and doesn’t seem to be on the same page as the Fed. Inflation was higher in December and again here in January. Typically, it takes 8 months for a rate change to have an impact on the economy (which would be April). I don’t expect the Fed to decrease rates in March and best cash scenario might be two .25 decreases in the second half of the year.
The bond market (which impacts home mortgage and land note pricing) has been moving lower since October. Long term interest rates have been more reasonable which is helping (slightly) the housing market get homes moved. This is good if you are in the market for ag real estate this year.
Land Prices
I feel we have peaked over the past 18 months and are on our way down. 2022 was arguably the most profitable farming year ever and it left a lot of cash burning holes in farmer’s pockets. We have used up a lot of that cash (more on that later) and the interest in new listings seems to be down. I haven’t seen a new high land price in a county nearby for a while and expect to be steady to lower (0-10%) through 2024.
Yields
We were in a heavy drought in south central Nebraska. Irrigated crops seemed to do as expected but were not record breaking and took a ton of water. Irrigated soybeans had white mold issues. Irrigated corners were often zeroed out while dryland fields were well below APH. There weren’t nearly as many bushels to sell and we are missing a few crop piles in the state.
Equipment Prices
I don’t expect new equipment prices to move lower, even in an ag recession. Equipment companies continue to invest and implement new technologies which will result in prices continuing to move higher on new items. One area I have seen producers save significantly is building their own high speed precision planters. If you can do this, it could save you $100k+ and make it way easier to handle repairs since you now know your planter like the back of your hand.
Operation Improvements
Any desire for updating equipment was addressed in 2023. Any plans for updating equipment are <$25k and there are no expectations for land purchases.
Commodity Price Direction
If you overlay an ending stocks to use ratio with corn prices, it doesn’t paint a pretty picture. Our current figure is around 14%, which historically would imply corn prices below $4/bu. In fact, by overlaying the ending stocks to use ratio with overall farm profitability, you see most figures 10% or higher are almost breakeven at best. Profitability is found with a single-digit stocks to use ratio.
Marketing and Weather
Some reports show the possibility of a wet spring which would be beneficial for a spring rally. Weather changes daily and I don’t like making marketing decisions off weather percentages. That said, spring rally’s (between March and mid-June) are the rally I personally try to sell on. I am not a marketer and refer any marketing discussions to the professionals.
Working Capital Trend
It was not uncommon for 1,000-3,000 acre operations to lose between $250k-$600k in Working Capital this year. $200k from poor yields/prices. $250k+ from equipment purchases paid with cash to avoid high interest rates. In some cases, it would be wise to term out those equipment purchases now to put the Working Capital back into your operation or lessen the losses. Term notes are currently cheaper than borrowing money on your Line of Credit. You can term the equipment out to replenish Working Capital, save on interest for 2024, and pay off the note if you have a really strong year.
Overall Financial Picture
It is very possible to lose Working Capital while still maintaining or growing your overall Net Worth position through debt paydown and increased value in long-term assets. That situation is playing out for some operations who mostly limited capital purchases in 2023. If there was significant equipment bought with cash, it is likely there are losses in Working Capital and Net Worth. Every operation, regardless of their Working Capital or Net Worth movement in 2023, will need to be very careful with all expenses, decision making, and marketing in 2024 to be profitable. Farm made projections are very tight even with some overly optimistic commodity prices.
Final Summary
Every operation is different and needs alternative advice compared to their neighbor. Nothing mentioned above is a one size fits all approach. While I hope this is helpful, what is better for your operation’s well-being is to update your own financials, run them by a trusted financial advisor, make your own plan for the upcoming year, and adjust that plan when necessary.
Good luck and have a great week!
Grant
All views expressed on this site are my own and do not represent the opinions of any entity whatsoever with which I have been, am now, or will be affiliated. Information provided is authentic to the best of my knowledge, and as such, is prone to errors and the absence of key details. The content of this blog is for entertainment and informative purposes and should not be seen as professional advice to finances or any other field.