By: Chris L. Bruynis, Assistant Professor & OSU Extension Educator
This year is turning out to be a challenging year not only due to the weather, but due to low revenue streams into many family farm businesses. Granted not all family farms will find themselves facing financial issues, but there will be some that will. For those that will, the stress can be significant and management decisions paramount.
The starting place is to determine if the issue is a profitability, liquidity, or solvency issue. Managers need to determine if the lack of profitability is temporary due to an isolated condition or if the problem is likely to continue into future years if no business changes occur. If the business is not profitable, then management decisions need to be made to correct the problem. If management determines that business changes cannot correct the lack of profitability (like not having control over commodity prices), then they must put a timeline on how long they can or want to continue to farm waiting on these conditions to change. There are several considerations that farmers need to think about including the operator’s current age, potential income streams if they exit farming, future generations’ involvement in the business, and current net worth.
Solvency should be examined to determine the risk capacity of the farm business (see http://www.cffm.umn.edu/Publications/pubs/FarmMgtTopics/FarmFinanceScorecard.pdf to calculate and interpret financial ratios). If the farm has very low levels of debt relative to the asset valuation, there is capacity to borrow additional funds to survive the financial shortcomings of 2015. If the opposite is true, additional loans, at least from traditional sources, will probably not be an option. Solvency examines the business’ overall ability to meet its financial obligation. Liquidity is similar but only looks at the business’ current year ability to cash flow the operation. Businesses that can remain liquid, even though unprofitable, can survive the short term financial shortfall.
Financial shortfalls are stressful on farmers and their families. Research following the farm crises of the early 1980’s showed that farmers used three strategies to manage the financial shortfalls. These were increase/extending income, decrease expenses, or increase labor income (efficiency). These concepts are not all that difficult to identify, however, actually putting them into practice is more challenging. Here is a list of ideas to consider. Be careful to think these through completely and find a strategy that does not further reduce family income or put the farm business at risk long term.
- Shift the farm business toward more profitable enterprises
- Renegotiate lease rates on assets used in the farm business (ie. land, equipment)
- Sell non-productive or unused assets
- Refinance operating loans to improve cash flow (only if financial decline is temporary)
- Seek off-farm employment only if it does not affect farm productivity(for one or more family members involved in the business)
- Increase the acres or number of livestock to improve labor efficiency on profitable enterprises (only if not already fully employed – remember you still have to have time to manage the business)
- Make sure there is a positive rate of return on all inputs (ie. fungicides, micronutrients, feed additives, etc.). If it costs to $5.00 to make $2.50, why are you doing it?
- Select lower priced inputs (providing they preform similarly – don’t pay for brand recognition)
- Delay nutrient application (providing the soil fertility is adequate to grow desired crops)
- Delay replacing capital assets (this only works until repairs, delays, etc. become greater than loan payments)
- Reduce family living costs (delay vacations, major home renovation, big ticket furniture and appliances, etc)
This is not an exhaustive list of possible management decisions that farmers can make in their businesses but a starting place to start the thought process. The main message is to pay careful attention to your business’ profitability, liquidity and solvency to make sure financial stress is identified quickly and the appropriate management decision(s) implemented to prevent further financial decline.