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Farm Management in the New Reality

03/02/2014


The last few years have been extremely positive for the grain sector, but now there’s a new reality.

Grain prices have dropped significantly since the summer, and there is no indication that they will rally soon. Projected crop returns for this year are much lower than desired, with some crops projected to have negative returns for the first time in many years.

At the same time, land prices and rent have rapidly increased to historical highs, and the high grain prices of the past led many producers to make significant investments in their operations. Some borrowed substantial amounts to make these investments.

Having made these long-term investments based on short-term prices, these producers are now faced with having to pay back loans with significantly less cash flowing into the business.

In light of these changes, grain producers need to start playing defence. If farmers want to weather this period, they need to start planning now how they’re going to do that.

If you are in this situation, the first thing to do is a good old-fashioned reality check. Take a close look at what’s happening inside and outside of your operation so that you know where you stand. This may be uncomfortable, but discomfort is a clear sign that it is something that must be done immediately.

Look at your external situation. Farmers sell into commodity markets, and sometimes there are periods when they are forced to sell for a loss. That is simply how commodity markets work.

Take the time now to look at the commodities you produce and the factors influencing their markets. Is there relief in sight or do you need to work with the current price levels for the next few years?

Next, look at your internal situation. Do an annual projection, including all fixed expenses, to determine your cost of production and cash requirement to run the farm this year.

If it is showing negative returns and negative cash flow, you need to think about the implications and understand the magnitude of the situation.

Do you have the equity and cash resources to handle the losses? If not, it’s time to start looking at what you can change in your operation to keep going.

Once you have a clear picture of the reality of your situation, including a strong understanding of the fundamentals of your markets, you can start planning how you are going to manage.

As every producer knows, markets dip and eventually come up again. By actively managing the farm and making the right decisions for the new reality, producers can mitigate the impacts of today’s lower grain prices and position themselves for success when prices rise again.

This article was origianlly published in the Western Producer on January 30, 2014.