Managing Agriculture Cash Flows in a Challenging Market
Insights from Jessica Lehman, Director of Food and Agribusiness, First Financial Bank
Nurturing the growth of local agribusinesses is one of the highlights of my work. In down markets, the most successful businesses have trusted financial partners who ask, "What can we do now to prepare for success in challenging markets?" In these times, there is always opportunity for growth or diversification; but it requires a keen eye for profitable margins and understanding of risks associated with change. The worst thing a banker could possibly do is say "yes" to a structure that could be detrimental to the overall success of the operation.
By approaching your business pragmatically and thinking ahead on a few key topics, you can be ready to weather any market and watch your business thrive.
Know the variables
Start by tracking the variables that go into running a profitable agricultural business. Farmers are often familiar with tracking variables like crop prices, weather events, seed and fertilizer cost. Sometimes, however, farmers forget to follow the ripple effect and track the impact these variables have on cash flow.
To find success in the agricultural sector, you need to understand the importance of tracking cash flow because a constrained cash flow can impact plans, expansions, or investments. Staying up to date on your cash flow avoids surprises and gives you time to react and adjust plans, all to ensure you have access to working capital when needed.
Stay flexible and think ahead
As the economic environment changes, you need to be flexible in how you approach your business. Historically, many farm operations operated in low interest rate environments for decades, with interest cost accounting for less than 5% of their operating expenses. Now, with interest rates on the rise, farmers need to weigh the cost of operating and term interest against the opportunity of carry and basis in the market. Alternatively, cash on hand could be earning as much as 5% when invested, which could be more than gain on storage of crops less interest cost. Pay attention to how you use credit, with an eye to the state of the market and the difference of interest on credit versus interest on investment. All these variables must be weighed to inform you of the right time to make a credit-based purchase for the growth of your business, and the right time to let financial investments grow in preparation for making the purchase at a different time.
Take time to dive into the numbers early and often so that you adequately plan for the agronomic portion of the business. This allows you to focus on maximizing your profit and producing sustainable yields in the future.
Flexibility is also needed in your sales and marketing plan, which should be written out clearly at the beginning of the year. Periodically forecast your business outcomes, understanding your current and future costs. This way, if you encounter a change in commodities, you already know how you plan to adjust your marketing plan, whether it be a change to your prices or looking for new or additional buyers. Addressing changes early can keep a small change from becoming a major crisis. Gambling on a higher price at a future date is risky, so you may want to sell a portion of your expected yield before it is harvested to lock in a good price.
Be ready for challenges
As the famous saying goes, the only constant in life is change. Create back-up plans so you can be ready for the inevitable unexpected. For instance, analyze your past spend so you know what your core needs are. This information can inform a plan in place for cutting costs and preserving your cash if required.
It’s also wise to take a long-term outlook. Plan years ahead, not months. Create a safety net in good times so you can use for necessary investments or expansions, even if the market is rough. Explore alternative revenue streams such as renting out equipment, adding enterprises along the value chain such as grain storage, agronomy services, or further processing of raw commodities. Diversification is an important part of business stability, so explore crops with added premiums, or leasing farmland and custom farming. Having multiple ventures can help you build that financial reservoir which will sustain you in tougher climates.
If you need to line up working capital to cover important expenses, your financial partner can work with you to determine when a loan makes sense and how much you qualify to receive. The best partners get to know your business inside and out so they can create custom solutions that suit your unique challenges and specific business goals.
Success in the agricultural industry depends on finding a financial partner that understands your business, as well as the seasonality, opportunities and risks that are associated with agribusiness. By finding a banking partner that is aligned with your overall goals, planning ahead, preparing for challenges, and being transparent with your financial partner can set you up for success for years to come.
