Diminishing Farm Returns
Diminishing Farm Returns- Now What?
In conjunction with the Kansas State Ag Econ department, we recently hosted a meeting that focused on ten considerations to make during a struggling farm economy. There are two basic ways to make a positive return. One is to increase income; the other is to decrease expenses. While increasing the farm income may be a daunting task for the upcoming year, there are usually some places to cut costs in all farming operations. A major focus of the meeting was to re-assess all areas of the farm operation and determine how to stay afloat during these tough economic times.
1. Maintaining Working Capital- Working capital is essentially taking the value of all current assets and subtracting all current liabilities. The number that remains is the working capital. It is the ability to cover current expenses with liquid assets. The key is to understand your farm’s current position and use that information to prepare for the future.
2. Restructuring Debt- There may be places to restructure debt in an operation. Looking at long-term goals and potential strategies can be helpful to ensure the long-term survival of an operation. There may be a need to examine the short-term situation by constructing a regular cash flow.
3. How Long Can I Afford to Lose Money on Rented Ground?- It is no secret that land rental values do not adjust as quickly as changes in commodity prices. This may be the result of multi-year leases with fixed cash rents, negotiating a lower rent may be difficult in some cases, and landowners may search for other tenants who are willing to pay their asking price. A difficult decision is to let land go, often because you may never have the chance to rent it again. In some cases, there may not be a choice. A lender may require you to release the ground or you may not be able to cover your variable costs.
4. Opportunities to Save on Cost of Production- The overwhelming expense for most livestock producers are feed costs. One way to reduce feed costs is to extend the grazing season. This can be done with crop residues or a cost effective cover crop. Another option is to reduce waste. A simple change in the type of hay ring used may drastically reduce the amount of hay wasted. Also, there are often seed, chemical and machinery cost strategies that can help to reduce costs. Simply improving record keeping may even help to reduce inputs.
5. Getting Creative with Enterprise Diversification- There may be crop or livestock options that have the potential to generate income for your operation that have been previously overlooked. Agritourism, non-traditional markets and wildlife leases are a few potential options. Now is the time to start thinking creatively and find those areas that can help to increase profit.
6. Managing Machinery Expenses- There are many questions one should ask themselves when considering purchasing machinery. First, “How much does it cost?” This should include both the total cost and what would be the cost per acre. Also, “Will the machine increase efficiency or profitability or can my capital be used more profitably in other areas of my farm?” Indeed putting a value on reliability and timelessness is also helping with making a machinery cost decision.
7. Safety Nets- Unfortunately, most producers have been disappointed with the way the 2014 Farm Bill has played out thus far. Hindsight is 20/20, but if farmers had a chance to make their ARC and PLC determinations again, they would likely enroll wheat and grain sorghum in PLC, soybeans in ARC-Co and corn would depend on the county yield distribution and the FSA approved farm program corn yield.
8. Income Tax Management- Planning in low income years is just as important as high years. Avoid Net Operating Losses, maximize credits when available and avoid potential tax traps.
9. Is it Time to Retire?- Look at all financial obligations. These can include long-term debt and health care issues. Also begin to analyze income options. There may be cash rent or crop share potentials, Social Security, or even selling land or cattle to your successors on a 20 year contract.
10. Family Living Expenses- The farm outlook does not look very promising for the next 2-3 years, so every cost category is important. Keep good records of all household expenses and determine those areas where expenses can be cut.
There may be a down turn in the farm economy, but it is certainly not the first and won’t be the last. The resiliency and resourcefulness of agriculture producers are second to none. As most experienced producers will say, now is the time to hunker down and weather the storm.
If you have questions or would like more information, please call me at the office (620) 331-2690 or email me at jlsigle@ksu.edu. To view this or any past articles or radio recordings from the Wildcat District Ag Agents, please visit the Wildcat Extension District website at www.wildcatdistrict.ksu.edu.
Contact:
Jeri Geren
Diversified Ag and Natural Resources Agent
Wildcat Extension District
jlsigle@ksu.edu
(620) 331-2690
Twitter: WEDCrops
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