Round-table webinar
I will be a guest panelist joining Tim Hammerich and others as we explore farming in a low margin, high interest rate environment. Register below to join us!
Registration Link: Found here
When: February 22, 8:00 am – 9:00 am CT
Description: Lower commodity prices, higher production costs, and sustained high interest rates have put increasing pressure on working capital. It’s now your greatest asset and biggest competitive advantage. Join Tim Hammerich and leading farm financial coaches to explore how to expand in a downturn. You will learn how to create a capital plan across a range of financial scenarios while understanding how to access the capital you need to grow.
Your ’24 Gameplan
Trying something different with the table above to help operations prepare for the upcoming year. Find out where you fall on the table, then read the suggestions below.
I want to be very clear these are not specific recommendations but are very broad for the industry. Every operation needs a unique approach and has different scenarios to consider, along with dozens of ratios and numbers to differentiate from one another.
That said, here are very loose guidelines for how you may try to approach the 2024 crop year based on your financial position.
Examples of how to calculate your position can be found under ‘Terms’ at the bottom of the page.
NW Strong WC > $400/a & Strong DCR > 1.50:1
This is a strong position to be in. Continue to maintain Working Capital and wait for an investment opportunity that fits your operation; there could be bargains on the way for those who are ready. The ideal asset purchase would increase future cash flow.
NE Weak WC < $250/a & Strong DCR > 1.50:1
If the farmers who are short on WC used cash to make a lot of purchases in the past two years and are feeling stress, one solution to get that cash back may be to take out a loan on the recently purchased asset that has no leverage against it. You need to make sure you have a strong DCR after pulling the trigger to add the debt, don’t sacrifice all your cash flow. You have strong earnings, maintain this to build Working Capital back to safe levels.
SW Strong WC > $400/a & Weak DCR < 1.20:1
If cash flow is tight but cash is strong, hunker down and don’t buy anything. Let the cash help you ride out this tough cycle until you can be profitable again. Most operations I have visited with are in this position.
SE Weak WC < $250/a & Weak DCR < 1.20:1
If cash flow is tight and cash is tight, in February of 2024, you may want to act.
A good starting point is to reign in expenses and get greedy with your money. The first trials to fix the problem should come from the producer, not the lender with band aids. If you don’t fix the spending problem and the lender terms out purchases to give you more cash, you will just blow through that cash again and end up in a worse position than where you started.
Terms:
Working Capital (WC) = Current assets – current liabilities. This comes from your balance sheet.
Working Capital/a is found by taking your total Working Capital divided by the total acres farmed + number of cattle in operation.
Example: Working Capital of $420,250 / 1300a farmed + 250hd cattle = WC/a of $271/a.
Net Farm Income (NFI, which includes taxes) comes from the bottom of your cash flow or projection. Subtract out depreciation (if you included it in your cash flow) and term interest payments to find your repayment capacity.
NFI – depreciation – term interest = Repayment Capacity
The Repayment Capacity shows how much income your farming operation has left after expenses to cover debt obligations in the upcoming year. The final step is to take your Repayment Capacity divided by your scheduled debt payments to find the Debt Coverage Ratio.
Repayment Capacity / (term interest + term principal) = DCR
Example: Repayment Capacity of $123,500 / total debt payments of $86,723 = DCR of 1.42:1.
The higher the DCR, the more funds you have left over to cover loan payments. You increase your DCR be paying off debt or generating a larger repayment capacity.
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.