The farm economy has been ailing for quite a while, but new data show the patient may be recovering. USDA reported in August that net farm income is up 3.1% nationwide at $63.4 billion.
Nevertheless, with stagnant grain prices, cropland values steady or lower, and input costs still a pain to pay, production margins remain tight at best.
Thankfully, there are potential cures that lead to better returns.
Recent Farm Futures survey responses revealed several real-life moves farmers are making right now that can improve the bottom line — for the 2018 season or beyond.
Here are two ideas that are worth a look. Watch this series for more.
If you haven’t already, Refinance your ground
At 60, Indiana grower Grant McBee has faced about everything farming can throw at him. Land costs are always a challenge. But McBee tackled higher land costs by working to lower his interest rates 2%, by refinancing a loan on 900 acres of good corn and soybean ground.
“My brother and I refinanced that land in late August,” McBee says. “It had been at 6% on a ‘swap loan’ tied to a treasury bill. We could have faced a significant penalty if we hadn’t been able to refinance it. We were happy to get it locked in at 4%.”
McBee farms about 2,800 acres outside Lafayette. He typically has a 50-50 corn and bean rotation. He rents about 340 acres of ground from two separate relatives. McBee and his brother and mother own the rest of the land.
“Tillable ground here ranges from about $7,000 to $9,500 per acre,” says McBee. “Higher interest rates can run into a lot of money and cut into profit potential. We refinanced another farm last year and were able to reduce the rate by just under 1%.”
Earlier this year Farm Credit Services of America reported that the overall trend of weakening cropland prices continued through 2016 in grain belt states. In its survey, Farm Credit found that Iowa cropland was down 2.8% in 2016 compared to 2015, to an average of $8,123 per acre; South Dakota ground was down 8.6% to $4,813; Nebraska dryland acres were down 4.8% at $4,432; and eastern Kansas was down 3.7% to $4,097.
“We are continuously looking at ways to manage our costs, and reducing mortgage rates are among them,” McBee says.
Recalculate a more realistic balance sheet
Grain prices are stuck in a rut and land values remain under pressure. If your farm’s balance sheet doesn’t reflect these trends and how they truly impact your bottom line, maybe it’s time for a recalculation.
Don’t feel alone if you’re in the dark on your financial status, notes Nate Franzen, ag division president at First Dakota National Bank, Yankton, S.D.
“The U.S. ag industry is weak in the area of accurate financial reporting,” he says. “It’s definitely something we talk about in our lender staff meetings.”
Farmers who seek financing must have accurate numbers. As margins tighten and values change, they need to stay on top of their finances to make real-time decisions.
Is the practice of cash accounting to blame for this?
“For many, it gets down to managing the tax system, which allows for a lot of flexibility,” Franzen says. “Producers ask themselves, ‘Where can I defer income and delay taxes?’ It’s an annual focus for a lot of farmers: ‘How do I work the cash accounting system?’
“They forget to develop an accurate balance sheet and income statement on an accrual basis, which identifies true profitability.”
He says Canada is a step ahead of the U.S. in that area. “Canadian producers are taxed on an accrual basis,” he says. “They must have a CPA-prepared accrual financial statement. It’s much more accurate.”
There’s plenty of help available for aligning a farm balance sheet through Extension and CPA firms with ag specialists on board.
“The CPA can cost a little money, but with the high capital investments farmers have in their operations, expertise is needed to maintain an accurate balance sheet,” Franzen says.
Lenders can help farmers find the expertise they need. Some may push the envelope to help farmers prepare their financials. “But it’s a delicate situation for lenders — to determine if a customer is credit-worthy or not,” Franzen says. “They must be careful to not get too engaged in the preparation of financials, or they open themselves up to potential lender liability issues.”