Its July, its hot, and the worry will soon set in on Harvest ‘17. Minus some late season applications, the die has been cast on the crop, and mother nature will be the deciding factor as the crop moves toward maturity. It is time to evaluate where the farm operation is, where it is going, and where it needs to steer clear of in the coming years.
Does your operation have a one year, three year, and five-year plan? Has it reviewed its relationships with its land owners recently? When is the operation going to need more labor? Where will it get that labor, and how will it retain its help when competing with off-farm jobs? Does the estate plan match the business plan? What vendors can you rely upon to grow with you, and which ones are not up to the task? Have you outgrown relationships with vendors and end users of your product? Why do you buy and sell where you do? How could you make it more efficient? How will new federal or state legislation and programs impact your operation? What would a sustained 10% hit to the gross income do to your operation and how would it adjust. Same question at 20%.
These questions need to be asked frequently, and they need to be answered honestly after considering the environment you are operating in.
Consider a couple of the environmental factors farm operations are experiencing right now.
This year has been particularly interesting for farm operators, as lenders are tightening their purse strings, margins seem to be shrinking, and the equity in the once red hot farm land market appears to be receding. Dairy operations are being asked to check with the buying creamery before expanding herds significantly.
Banks are not keen on the slim cash flows. Operators are being asked to consider consolidation, releasing high rental rate ground, and stream lining their operations to be lean in the coming years. Those operators who bought shiny equipment in the last several years are starting to regret aggressive short term note payments and taking accelerated depreciation.
The ever-aging population of farm land owners who are needing high rents to cash flower their health care needs. What does your land owner need from its tenant to meet its own obligations?
While farm operators are used to having to know everything from tire changing, yield monitor calibration, and agronomy, it is highly unlikely to have all the answers yourself. Those involved with professionals like tax preparers, lawyers, appraisers, marketing specialists, and bankers, to accurately assess the question and its costs, will be far better off.
Consider this example of behaving like a professional. A large dairy operation installed a scale and told its suppliers point blank, “we will pay for what goes across the scale on the farm, scale in and scale out.” The operation thinks the scale paid for itself the first year.
Businesses that grow take risks, and balance it with the reward. The opportunities for those with the patience and planning will be many in the coming years. A solid cash base to work from will result in opportunities for capital and equipment purchases in the coming years with good value. Operators who can “do the math”, make cash flows that work, and treat farming operations as business operations, not emotional baggage, will be poised to capitalize and grow.