Time to build liquidity?

   

Farmers may not want to hear this in public, but this will be a very, very good year for most of them. With decent to exceptional grain yields and very strong prices, life is good.

So what's the best way to handle this newfound wealth? Party in Cancun? A new speedboat?

Sounds tempting, and no doubt there's a few folks who will be cruising the Internet for good deals on exotic vacations after harvest. But the sensible thing to do may be a lot more boring: build liquidity for a rainy day.

Everyone knows grain prices won't stay high forever. Meanwhile input costs, particularly cash rent and land values, continue to move higher. They won't come down even when grain prices soften.

"With unexpected profit, your number one priority should be to build liquidity,•bCrLf agrees Moe Russell, a Panora, Iowa financial consultant. "Bulletproofing your balance sheet during these volatile times is really going to pay off.•bCrLf

Russell urges his farmer clients to build enough working capital to cover at least 50% of annual expenses.

"Liquidity is the first shock absorber when there are bumps in the road,•bCrLf says Russell. "You need a financial shock absorber to buffer the ramifications of rapidly fluctuating grain prices.•bCrLf

Land purchases may be tempting, even with prices at historic highs. But Russell believes input costs and higher machinery costs will quickly begin to clamp down on the wider profit margins we're seeing now. He believes growers in the grain belt should look at adding grain storage capacity and upgrading equipment, with highest returns coming in three areas: planters, sprayers and combines.

"Those are the highest payout investments in equipment as opposed to new power units,•bCrLf he says.

Darrell Dunteman, Illinois-based farm accountant, believes land purchases make sense only if you can put at least 50% down.

"It's likely better to channel funds to purchases of grain bins, tiling and irrigation that will improve profitability in the future,•bCrLf he says.

Farm Bill analyzer Here's one of the best tools on the net right now to determine how farmers would fare if certain Farm Bills were to be voted and passed this year. Right now this spreadsheet, which is downloadable here, compares payments between the 2007 Farm Bill alternatives: The Bill passed by the House and the Durbin-Brown amendment offered in the Senate.

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