COMMON GROUND BLOG

Find trends and outlooks, education and more on financing rural America from Farm Credit Services of America.

More Content

Balance Sheet Changes May Bail Out Cash Flow

In today’s agriculture economy, “creative financing” means looking beyond cash flow to put your operation on better footing.

We developed three case studies for our GrowingOn® 2016 meetings that examine actual farm operations. All three operations were solvent – a positive net worth – but had liquidity problems – insufficient working capital and, in some cases, negative net cash income. Instead of focusing on variable costs, the producers restructured loans, unloaded underperforming assets and applied other “creative” solutions to liquidity problems.

Steve Johnson, farm and agriculture business management specialist with Iowa State University Extension, is presenting the case studies at our free GrowingOn meetings that run through January. Larry Landholder is one of the featured producers.

Larry owns 1,500 acres and rents 500. His operation is solvent, with net worth of $4.5 million, including $2.5 million in land equity. Net farm income for 2015 was positive at $64,000. However, Larry lacks working capital, which is negative $77,000 ($34/acre), and has two machinery loans with annual payments of $138,000 and one real estate loan payment of $95,000 a year. Suppose Larry trims his input costs by $35/acre. That boosts his income by $70,000 -- certainly an improvement. But Larry still can’t meet his machinery payment and he risks reduced yields. And what about next year?

Instead, looking at his strong balance sheet, he could use equity in his land for a new $130,000, 10-year loan to pay off a machinery loan. A new 20-year loan for $800,000 on real estate equity would allow him to pay off the other machinery loan, pay down his operating loan and strengthen his cash position. As the simplified table below shows, working capital would jump from minus $77,000 to $414,000. And while real estate payments would rise from $95,000 a year to $180,000 a year, machinery payments would drop from $138,000 annually to zero. Netted out, that’s $53,000 a year less in debt payments.

Financial categories

Status Quo

Solution

Working capital

-$77,000

$414,000

Machinery/equip. payments (princ + int)

$138,000

$0

Real estate payments (princ + int)

$95,000

$180,000

On a per acre basis

 

 

Working capital per acre

-$38

$200

Machinery payment per acre

$69

$0

Real estate payment per acre

$63

$120


 “Fixed costs are where producers can really make a difference,” said Tom Dobbe, regional vice president for FCSAmerica’s Lincoln office.  ”They may be able to narrow their income gap by $50 to $100 per acre.That’s why we are urging they look into the four Rs – re-amortize land, refinance machinery/equipment, renegotiate land rent, and re-assess family living expenses.”

The latter is one of the toughest to pull back, Dobbe said: “It’s painful to tell your family there won’t be a vacation this year or someone needs to take an off-farm job.

“On the positive side, although land values have turned to the downside, the reductions thus far have been modest when compared with the exceptionally strong growth over the past five or 10 years. And interest rates are still near historic lows, so this is not a bad time to lock in long-term rates.”

COMMENTS

Load more comments
Your comment has been received and is being reviewed.
avatar

Comments are moderated and reviewed before they are posted on the site. View our terms of use.

YOU MIGHT BE
INTERESTED IN

Dec 31, 2018 |

What Weather is in Store This Year?

Register today for one of our free GrowingOn® meetings in Iowa during the month of January to hear the latest insights from weather expert Eric Snodgrass.

Dec 30, 2013 | The Business of Agriculture

Risky Environment Calls for Close Eye on Breakeven, Insurance and Marketing Plans

Heading into 2014, corn and soybean prices have declined while input prices are flat, so margins will be tighter. This intensifies the need for smart planning and marketing.

Dec 11, 2014 | Crop Insurance

Tools to Managing Commodity Price Volatility

With interest rates still near historical all-time lows, agriculture producers have a prime opportunity to structure debt and focus on working capital to withstand commodity price volatility.

Ready to Talk?

Contact us if you have questions or need more information. Fill out the form, or connect with your local office using the Office Locator.

FCSAmerica serves farmers, ranchers, agribusinesses and rural residents in Iowa, Nebraska, South Dakota and Wyoming. For inquiries outside this geography, use the Farm Credit Association Locator  to contact your local office.