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Working Capital: The Original Risk Management Tool

Farm Credit Services of America (FCSAmerica) and Frontier Farm Credit are co-sponsoring a webinar series, Two Economists and a Lender. This October installment, featured Agriculture Economic Insights (AEI) co-founders David Widmar and Brent Gloy and Chris Williams, a financial officer in Manhattan, Kansas, focused on working capital.

Below are highlights from their discussion, as well as the full webinar.

 
 

Working capital is one of the most talked-about indicators of financial well-being in today’s agricultural industry – and for good reason. Working capital is a producer’s first line of defense in challenging times. On the flip side, it is critical to capitalizing on opportunity.

The definition of working capital is current assets minus current liabilities. Current assets are those that are expected to be converted to cash within a year: cash/savings, grain or livestock inventories, and input inventory. Current liabilities are those due within the next year: bills to be paid and this year’s portion of long-term debt payments.

Which measure?

Brent Gloy and David Widmar shared several ways to look at working capital. The measures included:

  • Total dollars
  • Dollars per acre or per head
  • Current ratio: current assets/current liabilities
  • As a share of gross revenue

“Benchmarking against ratios can help you get a feel for where you are,” Widmar said. But “don’t get hung up on the nuances; just choose one that works for you to track.”

Widmar also advised producers to be mindful of the risk associated with asset valuation.

“A dollar in your bank account is not the same as a bushel of grain in a bin,” he said. “It’s really important to be aware of price changes that can significantly affect your cash on hand.”

By using the same measurement/s to track working capital, producers can identify trends and take corrective measures if needed, the economists said.

Set a goal and chart your course

As a general rule, Farm Credit Services of America advises producers to aim for $200 per acre in working capital. But many factors can influence available working capital, including:

  • Owned vs. rented farmland
  • Enterprises
  • Outlook for the next year
  • Personal preferences and plans (i.e. an operator’s risk tolerance, pace of growth ...)
  • A lender’s expectations.

If an operation needs to improve working capital, producers have options, said Chris Williams, who works with borrowers out of Frontier Farm Credit's Manhattan, Kan. office.

“Maybe there are some underutilized assets that can be sold. Or maybe there are ways of restructuring assets to free up cash,” he said. “However, those are short term. Ultimately, operational changes and profits from the business are the long-term answer.”

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