I recently came across a paper published in 1998 by the Department of Agricultural Economics at the University of Kentucky. The paper, Surviving a Farm Financial Crisis, provided recommendations farmers consider in tight financial times.
Fast forward to 2018 and those recommendations are relevant today. This article presents a condensed version of the paper published in 1998.
Planning
Farm financial survival relies upon good management, including successful production and financial planning. In times when net returns decline, the need for planning increases.
Two tools which can help organize the decision-making process are enterprise and cash flow budgets.
Enterprise budgets
The budgets published by Ohio State University Extension provide cost and return estimates that serve as an excellent base for developing your own enterprise budgets.
Cash flow budgets
The cash flow budget is helpful in establishing a repayment plan and determining borrowing needs.
While the cash flow budget doesn’t project profits, but rather net cash flow, it can assist in providing data for other areas such as tax planning.
Risk analysis
Business risks are mostly on the asset side of the balance sheet. Many are beyond the control of the farmer.
Farmers can minimize the effects of these business risks but the risks are still present.
Financial risks are directly controllable by the farmer. These risks are found on the liability side of the balance sheet and are determined by the degree of borrowing.
Debt/asset ratio
The debt-to-asset ratio compares total debt obligations owed against the value of the total farm assets. Debt/asset ratios below 50 percent are preferred. Debt-to-asset ratios above 50 percent indicate that more of the farm’s assets are owned by the lender than by the farmer.
Interest expense ratio
Another measure for determining if leverage is too high is the interest expense ratio. This ratio, taken from the income statement, is the total annual farm interest expense divided by annual gross revenues.
Interest expense ratios below 10 percent are preferred.
Options
Farms in financial crisis have limited options. It’s important to plan to avoid financial problems and use analysis to indicate the progress and severity of financial problems. However, knowing what options are available can help chart a course of action to head off or resolve financial distress.
Cost cutting
Cost cutting is often suggested as a solution to the income and cash flow problems.
The general rule is simply: “As long as the value of the output is greater than the cost of the input, continue to add input.”
The easiest way to apply this rule as you make decisions about your farm business is to ask: “Will it pay?”
You must guard against cutting cost without knowing how cost cutting will impact the productivity, efficiency, and effectiveness of your business.
One major input that you should not reduce during these tough times is the management of your farm business.
Asset liquidation
While this could be a time to liquidate some unproductive assets, others may have the same idea. This could result in depressed prices for machinery, equipment, and breeding livestock.
More importantly, as you sell these assets you may actually be liquidating your productive business.
Refinancing
Refinancing could lower interest rates and lengthen the repayment period.
You may also want to consider the refinancing option as an opportunity to roll operating debt into real estate debt. This option would change your debt structure and may offer the opportunity to reduce current cash flow obligations to meet operating debt payments.
Contact a lender to discuss refinancing options.
Enterprise mix
Stresses associated with financial crisis will cause farmers to ask, “What can I do to make more money?” Changes in the enterprise mix should be based on the relative profitability and associated risks.
Contact your local Extension educator or visit https://farmprofitability.osu.edu/ to learn more about the FINPACK farm financial analysis program and how it can help you.
Farm and off-farm alternatives. A simple acronym to guide the process of seeking “alternative” or “niche” markets is PRIMER.
The letters of PRIMER stand for Profitability, Resources, Information, Marketing, Enthusiasm, and Risk.
Use enterprise budgets to assess profit potential and determine what resources are currently available or will need to be acquired. Marketing is often key for alternative enterprises. Enthusiasm is important. Be sure you want to get into the enterprise, but also know why and when you should get out.
Finally, most “alternative” enterprises will be risky.
Sell out
While not preferred, this may be the best option. Stresses associated with the impending failure of a business are extreme. In the ’80s, many farm communities lost friends and neighbors to suicide. Stress counselors are available. Confer with local physicians or the health department to find what help is available and use it.
On the financial side, if sale of the business is being considered, understand the tax implications.
Take action
Final suggestions for dealing with financial crisis: Don’t delay action. Take steps to avoid financial difficulty if possible. Keep communication channels open.
Our first reaction to adversity is often to hide. Make sure family members, partners, and creditors are kept abreast of the situation. Family members, partners, and lenders are more likely to help than condemn.
This is a collective not an individual crisis situation. Don’t feel you have to endure it alone.
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Really? Awesome comparing todays dairy crisis to the one 20 years ago. We milked for 30 years and quit 5 years ago- selling 400 cows after so many average and poor years could not be made up by the few good years. What has happened to so many dairy farmers is crazy. Been so many programs started, articles wrote, fingers pointed and how come it still feels like the blame is all on the Farmer. And this is still 5 years past milking. Heres a good article for someone to research. How much debt is still owed by the dairy farmers that left the business and have to struggle to pay for loans and expenses accumulated by the large investment in being a dairy farmer. Will the struggle ever end? Not that I see. There are so many people and businesses that made alot of money off the dairy farmers but nobody noticed and nobody cares as long as they can grab that cheap gallon of milk.
Nice article- how we are suppose to fix our problems- with a 20 year old advice. Hmmm- everybody else out there still earning at the same level they did 20 years ago? People still ask us if we miss milking- are you kidding? Yes, we are happy people now and were before but the bitter taste is still there when we hear about dairy farms crisis again.
AMEN. DAIRY FARMERS ARE EARY TARGETS FOR SOCIETY. UNTIL NO FARMS NO FOOD !
Amen.
Thank you for your comments. This is something that disgusts me – good, hard working farmers are suffering & it is a sad and complicated issue. I wish I had an easy answer when I talk and meet with dairy farmers and their families. I have had countless discussions with farmers about this issue. It’s very sad this problem continues. I believe there will need to be fundamental changes in policy to correct the problems.