It's hard to believe that 2010 is now in the books and we are heading into 2011. A lot has happened in the past year. Much of the good news in agriculture is the fact that most crop producers had a good year last year. Livestock producers have been and will continue to be challenged to make a profit in the coming year. The most compelling factor is high feed prices due to strong corn and soybean prices that look to continue well into 2011. Soybean meal is approaching all-time highs and other feed inputs are following suit.
So where does this leave us for 2011? Crop revenues, as stated before, look to remain strong. But rising crop input and land costs could jeopardize any potential profits and add more risk to 2011 production and beyond. As mentioned livestock profit margins are likely to remain tight for the foreseeable future. This also means that short-term credit needs for agriculture will likely increase as farmers are handling a lot more money that just a few years ago. The good news is that interest rates are still relatively low and credit availability should remain good for farm businesses that are on a solid financial base. However, farms in a higher-risk financial position will find credit challenges especially the livestock producers that have not fully recovered from the significant financial losses incurred in 2008 and 2009.
Kent Thiesse is a Farm Financial Analyst and Vice President of Minnstar Bank in Lake Crystal. He recently wrote an article that has some interesting perspectives to consider as we move forward in 2011.
Be cautious of machinery and facility investments for the farm business
Make wise decisions on the use of available cash for these investments. Avoid purchasing unneeded farm machinery just to avoid paying taxes. Do upgrade farm machinery when the investment is needed and makes sense for your farm business. Remember that the term loans set up to finance these investments will require payments for several years and need to be factored into future cash flows.
Be cautious of buying
Good farmland is at an all-time high price. There has been and will continue to be land coming on the market in the coming months. Don't get caught up in the hype "Buy now, because they don't make any more farm land" Make sure that any land purchase is financially sound for your farm business. Compare the cost of owning land to the likely annual land rental rates. $6000 an acre land bought with money borrowed at a 5% interest rate will cost you $300 an acre just for interest without touching the principal! Of course, most lenders will require a significant down payment and will borrow only a portion of the amount needed to purchase the land. Again, using cash reserves to make a down payment on a parcel of land can really compromise your farm financial future. Those of you that farmed through the 1980's will remember that land prices took a big tumble and lost over half of its value over a few years. If your lender feels that you are in too deep or have an excessively high debt-to-asset ratio, you may be forced to sell some assets or mortgage property that had been free and clear.
Communicate with your lender
Meet with your Ag lender early to discuss your farm operating credit needs for 2011. Update your cash flow and discuss it with your lender. It is in your best interest to understand and be in control of your own cash flow whether your lender or your farm business management person prepares it. Work with your lender to look at any new purchases in the coming year. Fine tune your grain marketing plan and know your cost of production. Volatility will mark the farm markets for the foreseeable future. Take some time to work with someone to look at your farm financial situation.