What is in this article?:
- The watchword for 2014 ag finance is caution
- Watch liquidity
Many agricultural producers, especially those in the Midwest and Upper Great Plains, and owners of farmland nationwide have experienced an economic boom for the past several years. The question is, has that era come to an end?
Watch liquidity and leverage position carefully. A farm or ranch business with a debt/asset ratio of over 50 percent is skating on fairly thin ice at lower margins. Liquidity measured by net working capital / gross revenue needs to be kept above 30 percent and even higher if annual net cash flows are highly variable, the business is highly leveraged, or the business is operated primarily on cash rented land with multiple year leases.
Producers would also be well advised to fix interest rates even if it means restructuring some debt from short term to intermediate or long term and paying a slightly higher rate. Interest rate risk is real and in the current environment only one direction possible for a significant interest rate move—up.
Producers should also monitor actual cash flows versus projected cash flows on a regular basis and focus closely on variances to address problems, capitalize on opportunities or adjust future plans on a more timely basis. The ability to indentify problems or opportunities early and respond is an increasingly important key to business success.
Alpha farms that have grown rapidly and that haven’t mitigated the associated risks, will make headlines when they fail. But, a far greater number of farms/ranches have not continued as operating entities because they were not large enough or profitable enough to attract a successor, or as the result of management obsolescence in areas of increasing importance such as cost/managerial accounting, risk management, personnel management, financial analysis, informational technology and the latest developments in production technology.
From an overall credit perspective, adequate of loanable funds remain available, but both lenders and their regulators will be more proactive in risk assessment and risk mitigation due to the increasing uncertainty regarding the future of profit margins, land values, weather and government farm programs.
Danny Klinefelter is an Honor Professor, Regents Fellow and Extension Economist in the Department of Agricultural Economics, Texas A&M University.
Rodney Jones is an Associate Professor and Oklahoma Farm Credit Professor in the Department of Agricultural Economics, Oklahoma State University.