Top Producer Magazine / Website is a great resource for farmers that are trying to be the “Top Producer”. I recently came across a short article from their editor, Greg Vincent, about expanding a farm. He interviewed former Farm Credit Services of America (FCSA) financial officer turned financial consultant, Roger Schlitter. I thought it had a lot of good insights and will outline the four key points:
Step 1 - Working Capital
He suggested that a good rule of thumb is that any farmer should have at least $200 in working capital for each acre of land. Therefore, if you plan on acquiring a new quarter-section of land, you should have at least $32,000 of net working capital available. Working capital is the net operating items on the top of your balance sheet such as cash, crop inventories, crop receivables less accounts payables, operating lines of credit, etc.
“Operations with more than the minimum amount of working capital are the ones driving the market right now”
Step 2 – Secure the Cash
With the current banking environment, assets on hand are not worth as much as cash in the bank. If you have a lot of crop on hand, convert it to cash and pay down the debt.
Step 3 – Lock in Margins
Locking in input prices is just as important as locking in sales prices, especially with the volatility in fertilizer prices. But it is also about managing your land payments and making sure they are at a manageable level.
In 2008, when land prices were on the uptrend, Schlitter financed several farms with three different notes (1) a one year note, (2) a five year note, and (3) a 20 year note. When corn got to $4.50, the farmers sold it and used the proceeds to pay off the one and/or five year notes. Too many farmers wanted to get $7 corn, but remember this was about the first time for $4.50 corn. When you get a good profit, lock it in.
Step 4 – Balance Machinery Costs
As discussed in this blog many times, farmers are sometimes too concerned with reducing their tax costs by buying machinery, when they should be concerned about managing machinery costs and improving working capital.
“That’s a dead-end proposition. You cannot own $1,000,000 in machinery and farm the same number of acres as a guy who is doing it with $500,000. The other guy is going to have more money available as working capital than you do. That $500,000 more in equipment had to come out of your working capital. You have to balance your capital spending.”
All of these ideas have great merit. This is even true you are not expanding. All of these ideas will apply to all ”TOP” farm operations.