Ag Action Day at Kalamazoo Valley Community College last week provided ample opportunity for producers to obtain continuing RUP credits, learn new skills, hear about industry news, trends and forecasts and mingle with friends and neighbors in the business.
Most price outlooks for 2017 remain bleak. Roger Betz, MSU Extension senior farm business educator, broke down the prospects for corn production this year during one of the sessions.
Operating expense ratios for crop farms were 55 percent in 2011 and 2012, and have gradually increased to 81 percent in 2015. Net profit went from a whopping 36 percent to a meager 3 percent in the same time frame, dragging debt repayment capacity along into the downward spiral.
Debt-to-asset ratios shrank significantly between 2003 and 2012, but have since been moving upward.
With total farm debt on the upward tick and repayment capacities pinched hard, liquidity—or cash to pay bills and make payments—is at risk. Solvency overall for farms remains strong, but there are signs of structural cracks, according to Betz.
"After a long period of declining loan delinquencies, they (delinquency) are on the rise," Betz said.
Armed with the same outlook and historical data, lenders will likely be scrutinizing operating loans very hard this year.
"Some people are just not going to get that operating loan this year," Betz said.
What should farmers do to raise the odds in their favor for obtaining operating loans?
Betz said that the first step is to get a good set of numbers compiled for the farm.
"That means a balance sheet on Dec. 31 with a very good inventory, not just value of inventory but quantity," he said.
The inventory list should be an overlay to the balance sheet and compare it with previous years.
"Sure, your cash flow may look OK, but have you prepaid as many expenses as last year? Is your supply or stored crop inventory or livestock numbers down? Probably less than 20 percent of farmers do the balance sheet and actual accrual statement as well as they should," Betz added. "The real story is told when we look at value changes in inventory and if unpaid expenses are growing."
Extension specialists in business are good sources for help in preparing a strong accrual statement.
Preparing a monthly cash flow projection is also necessary. Farm financial information assistance can be obtained through MSU Extension, and the resources at http://msue.anr.msu.edu/topic/info/farm_management.
Controlling costs is an obvious approach, but Betz warned that there will be many bargains on machinery—especially used machinery—that may be hard to resist.
New credit should be scrutinized very carefully. Betz warned that now may just not be the time to replace equipment
Refinance, if needed, to help obtain a positive projected cash flow and lock in low interest rates, dumping variable rates obtained on the cheap for a locked-in rate as the Federal Reserve slowly begins moving the interest rate upwards.
Closely evaluate N, P and K. Is there nearby manure that can be utilized at a lesser cost and reduce purchased fertilizer?
Also, compare seed costs to see if another brand or variety could save money while maintaining yields.
Betz also suggests that if tillage equipment needs to be replaced, now could be a good time to reduce or eliminate tillage and move to a no-till or reduced till system.
Low corn prices are an opportunity to examine high cost rent agreements, and possibly move to a variable rate rent which includes a base plus rent based on market prices. A source for comparing the good and the bad on variable land rents contracts is provided by Michigan State University Extension at http://msue.anr.msu.edu/news/what_is_a_fair_farmland_rental_rate.
Some are caught in land rent contracts that are just too high.
"If the rent can't be adjusted, it may be time to let the property go," he added.
Betz's final word of advice? "Consider raising more soybeans in 2017."