Farm resilience starts with a solid financial foundation

How the MSU Extension Farm Business Management Team and their resources can help farms build resiliency.

Handling low profits means you need to manage the financial risks affecting your operation. Photo from iStock.

After struggling through the 2023 season, the agriculture community is looking to wrap up remaining harvest activities and reset for 2024. Finishing out the year means reflecting on input needs and maximizing future sales. Input prices are more favorable compared to last year’s historical highs. But commodity prices have also fallen, making future farm profits challenging to secure. Leaving many producers to wonder about their farm’s ability to handle a shift to potentially lower profits.

The MSU Extension Farm Business Management team offers some considerations and resources to help in planning your 2024 production season.

Financial Risk and Farm Profitability

Handling low profits means you need to manage the financial risks affecting your operation. These types of risks focus beyond production or marketing risks, such as poor weather or low market prices. Financial risks can be increased input costs, high levels of loan debt, low working capital and/or poor or incomplete budgeting for yearly needs. When these risks are present, there is often insufficient cash to pay bills, lower than anticipated profits and potential loss of owner equity. Farms that manage these risks are considered highly resilient.

When thinking about your farm’s profitability, consider whether your operation is financially resilient. How well can your farm absorb or withstand unexpected changes and potential financial risks? Do you have the ability to recover from these types of risks or adapt to change? How can you build and utilize your farm’s resilience when low profits are expected?

Building financial resilience starts with understanding your farm’s capacities and liabilities. This includes your level of working capital, existing debt, and operating efficiencies. Knowing what your capabilities are helps determine what options or opportunities are available to you. Equipped with this knowledge, you can make decisions that yield the best outcome for your business.

You Can Conduct Your Own Financial Analysis

Start by analyzing your previous production year. Adjusting cash transactions by accounting for pre-paid purchases, crop or livestock inventory changes from the beginning and end of the year, depreciation, loan balances and any unpaid bills reveals your actual revenues and costs. This analysis outlines your farm’s financial situation and capacities right now. It provides you with a picture of your actual profitability for the past year. For more information on financial analysis, visit the Farm Business Financial Analysis section of our website.

Project Your Cost of Production

This financial analysis also enables you to then look deeper at each individual commodity and what it actually costs you to raise them. Knowing last year’s cost of production can help you more accurately project this year’s cost of production. What costs will be the same or have changed because of input prices or changes on the farm? You should also consider any changes to production practices and their impacts on your overall costs. There are several tools available to assist producers in identifying their cost of production on the MSU Farm Management website Farm Business Cost of Production section.

Manage Your Costs

Once you can project this year’s cost of production, you have a better understanding of your farm’s potential profitability. Now you can think about how to manage it. Should your crop rotation be adjusted to more acres of one crop or another? Are there costs that can be changed or managed more closely? Many costs are set, what costs remain that you can impact? Do not forget smaller costs, these added together can cost just as much as larger items, like fertilizer or rent.

Rent is one area that needs to be a common talking point for farmers and managers. It is one of the largest costs and can mean a lot to your farm’s profitability. If a 200 bushel/acre corn farm lowered their rent $50/acre, that is the same as the price increasing $0.25/bushel. With a 60-bushel soybean yield, that would be an $0.83/bushel increase in price. Even if rent has been set for the year, it may still be the time to revisit those costs with landowners. Having a conversation about the current struggles in agriculture helps landowners to understand the impacts on you and the farm community. For information and assistance on rent value considerations, visit Farmland Leasing.

Revisit Risk Management Tools

In addition to knowing and managing your cost of production, examine what happens to your cost of production with an increase/decrease in yield and/or price. What risk management tools are you already using, or could you be using to manage this risk. Insurance policies that focus on yield protection may offer a safety net in years of adverse weather. Revenue policies through crop insurance may also assist in deciding how much of your production to market when securing farm revenues. Depending on market prices and your insurance level, this is another use for your projected cost of production. For more information on crop insurance options and their potential benefits, visit Farm Business Revenue Insurance.

Review Debt Payments

Another area to look into is how your farm debt is structured. What are the current loan payments you plan on making during or at the end of the season? How much of your farm profit will be needed to cover these payments? Speak with your creditors sooner, rather than later. This helps identify your options to ease financial burdens from borrowed debt. Look for options that keep profits from leaving your farm and available for your use where it is needed most. For more information on loans and the lending process, visit Farm Business Loans.

These collective resources developed by the MSU Extension Farm Business Management team can help your farm build resiliency. Understanding your farm’s financial situation provides you with a foundation of knowledge and outlines how resilient your business is to financial risks. It helps you identify your options or opportunities to reduce costs or capture profits when they are available. Examining your situation provides you with the ability to make sound, well-informed decisions to help your farm make it through these tough times. 

The team also provides support for farms looking to transition their farm business. As well as works closely with the MSU TelFarm Program, which offers accounting and financial analysis support. Contact a local member of the team today by visiting: Meet Our Farm Business Management Team.

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