11/11/2019 1 Alejandro Plastina, Ph.D. Assistant Professor/Extension Economist Department of Economics Pro-Ag Sioux City, IA – Nov 11, 2019 Farm Financial Situation and Strategies for 2020-2025 • US Farm Finances • Iowa Farm Finances • Strategies for Next 5 years Overview
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Farm Financial Situation and Strategies for 2020-2025€¦ · Pro-Ag Sioux City, IA – Nov 11, 2019 Farm Financial Situation and Strategies for 2020-2025 • US Farm Finances •
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Net Worth per Acre ($ nominal) Debt‐to‐Asset Ratio
Iowa Farms: Solvency (Land & Machinery at Cost Value)
Source: Iowa Farm Costs and Returns. Ag Decision Maker File C1‐10. Various years.
3.613.80
3.40 3.40 3.45 3.45 3.50 3.55
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Corn Price, U.S. Farms
USDA FAPRI
Projected Corn, Soybean Prices
8.48 9.00 8.85
8.45 8.55 8.60 8.70 8.85
0.001.002.003.004.005.006.007.008.009.00
10.00
Soybean Price, U.S. Farms
USDA FAPRI
Sources: FAPRI‐MU Bulletin #03‐19. October 2019. USDA/OCE Long‐Term Agricultural Projections. October 2019.
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Market Facilitation Program 2019 County 1st Round Per Acre Payment Rate
Announced July 2019Source: USDA, www.farmers.gov/manage/mfp
Market Facilitation Program 2019 County 2nd Round Per Acre Payment Rate
Announced November 2019Source: USDA, www.farmers.gov/manage/mfp
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Market Facilitation Program 2019 County TOTAL Per Acre Payment Rate
Source: USDA, www.farmers.gov/manage/mfp
Strategies to manage margins
• Major concern: cash flow / liquidity
• Solvency hit, but still strong:– Declining land values in Iowa
– Declining machinery values
• Long term problem strategy for 2-3 years
Slide from “Managing Tight Margins,” by Plastina & HartDecember 2015‐January 2016
5‐10 years!
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Strategies:1. Revise production costs
• Revise production plans, especially on rented land
• Can you make changes that generate savings that offset reductions in revenue? Visit with Agronomist. Example:
Switch to seeds with fewer traits (+crop management)? Net savings $25/acre.
If yield smaller than 7.2 bu/acre @ $3.50/bu, GO AHEAD!
Otherwise, NO GO.
• Seek volume discounts in seeds, chemicals, etc.
• Is input supply financing with low interest rate & no discount cheaper than traditional lending with higher interest rate & fall discount?
Strategies:2. Actively Manage Risks
• Know your break-even prices• Design a marketing plan with price and
date targets and stick to it• Revise crop insurance: SCO for shallow
loss?• Revise use of forward contracts & crop
insurance to finance inputs• Lock-in margins whenever possible
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Strategies:3. Limit working capital needs• Revise:
– share of rented land
– planting decisions in low yielding areas
– fixed costs over next 5 years
• Do you really need new machinery?
• Can you lease used equipment instead?
Strategies:4. Diversify Income
• Add or don’t lose non-farm income
• Consider alternative sources of revenue with your assets: custom work, snow removal, truck driving in fall & winter, ???
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Strategies:5. Revise family living expenses• Can big-ticket items be avoided/postponed?
– Truck purchase
– House remodeling plans
– Luxury vacation plans
– Lake House
Strategies:6. Secure repayment capacity
• Work a plan with your lender(s) for 2020-2025• Extend repayment schedules for existing loans to free up working
capital• If needed, use land equity to inject liquidity or repay short-term
loans• Take Action! if interest rates go up, or land/machinery values go
down, less bang for the buck (of equity).• Selling machinery, land can trigger capital gain taxes, depreciation
recapture, reducing disposable net revenue from saletax advisor
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Strategies:7. Revise Growth Strategy
• Align short term needs with long term growth goals• Offload unproductive assets
Depending on your growth stage:• Downsize • Slow down growth• Beginning farmers: wait to buy land
1. 2019 ARC-CO and PLC Corn about $11/acre
2. Update PLC yields (AgDM File A1-35)
3. Elect ARC/PLC for 2019-2020 (AgDM File A1-33)
Strategies:8. Choose ARC/PLC Program
ARC‐CO Corn ARC‐CO Soybeans
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Strategies:9. Develop a Plan B
• Protect your Cash Reserves
• Secure Emergency Loan terms in advance talk to your Lender(s)
• List Assets that could be sold to generate liquidity after taxes consult Tax Advisor
• How much equity are you willing to lose before exiting?
• Is it time to develop a transition plan?
Summary• Farm Income and Liquidity dependent on Government
Payments• Visit with: Agronomist – where to cut costs? Family – living expenses? Lender – refinance, lower annual payments? Tax advisor – value of assets after taxes? Crop Insurance Agent – enterprise/basic units? SCO?• Resources in Ag Decision Maker website