Ask These 3 Questions Before Any Farm Investment

The tide has finally turned. After seven years of depressed commodity prices, crop farmers are now staring at financial opportunities versus financial challenges.

Use this market rally to lock in profitable margins for this year and future years. That includes managing both the revenue side and the cost side, says Steve Nicholson, RaboResearch senior analyst for grain and oilseeds. These prices will encourage production, resulting sooner or later in surpluses and lower prices. 

In addition, high prices for commodities are soon followed by higher input costs. Nicholson says higher input prices could be in place as early as 2022. Additionally, input prices don’t decline at the same rate as commodity prices.

 

“Now is a time to not forget all the lessons we’ve learned in the lean years,” he says. “We can’t lose sight that you have to be the low-cost producer to survive long-term.”

Farmers can take many paths on the road to being a low-cost producer. Essentially, you are trying to tailor your investments to bolster your strengths and minimize your weaknesses, Nicholson says. Each expense must add value and efficiency to your farm.

Before making any investments this year, Nicholson suggests asking these questions:

“It’s a great time to sit down with your banker and think about what you need to do to be in a better place in a year or five years from now,” he says. 

Take A Strategic View of Your Farm

With your long-term goals in mind, consider ways you can make strategic investments and ensure profitability. This can come in the form of a new business initiative, better grain marketing or cost control. Nicholson suggests considering the following items:

How can I improve my working capital? Positive working capital is a sign of a healthy business, Nicholson says. The higher the ratio (above 1) of current assets to current liabilities, the more the operation can pay short-term liabilities and debt commitments and fund day-to-day operations rather than take on debt to run/grow the business.

Can you add a new revenue opportunity? This could include researching new crops such as non-GMO row crops, high-protein wheat or a niche crop. Or, is there a new service you could offer in terms of custom work?

What investments can you make to increase crop productivity? From a land management standpoint, this could be cover crops, tile, soil conservation structures, etc. 

How can you become a better grain marketer? Everyone gets caught up in the emotions of the markets, Nicholson says. At today’s prices, consider booking at least 25% to 33% of your average production. “That’s a good place to start,” he says. “You’ll sleep better, your spouse will sleep better, and your banker will sleep better. Then, put in an order a nickel down from what you think the top will be. Those wish orders tend to get hit at some point.”

Can you take a proactive step in pricing inputs? Talk now with your input providers on anything you can book now for next year’s crop, Nicholson suggests. “Take some risk off the table if you can,” he says. “I would not be bashful about asking. The worse thing they can say is no. If you’re a good customer, they are going to want to keep you happy.”