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Extension > Agricultural Business Management News > October 2014

Monday, October 20, 2014

Managing Farm Finances in Challenging Times - Strengthen Your Cash Position

By Don Nitchie, U of M Extension Educator, Agricultural Business Management

Many business management experts agree having a strong liquidity position is very important in times of tight profit margins or to survive (hopefully short) periods of negative profit margins. What is financial liquidity? It is the ability of a business to meet current (typically within the next year) liabilities with current assets on hand. Not all current assets are the same though.

An old saying in the investment world is "cash is king". This implies the value of cash on hand in your bank account is a known amount, its price will not change tomorrow, and you can use it immediately to pay a bill, make a loan payment or as a down payment without any further action. Grain and livestock in inventory, if at market weight or market ready, are current assets and could be on your balance sheet at one price but worth something far different a few days or weeks later. So, during lean times it can be very advantageous to maintain an increased portion of your liquidity in cash - more than you have in the recent past. Dr. David Kohl, Professor Emeritus at Virginia Tech, advises to keep one year of debt payments or two months of cash expenses in cash on hand, not just at year-end but at all times.

Many of us who lived through the high interest rates of the 1970's and 80's have some aversion to having too much cash on hand, as our experience taught us to keep our money working and earning all the time. But, with rates of returns from crop farming substantially lower and bank savings rates extremely low, there is substantial value in maintaining a ready cash reserve. Having strong liquidity in uncertain times strengthens the financial sustainability of the business.

The Farm Financial Standards Council indicates the ratio of your current assets (cash in the bank, grain or livestock on hand and market ready & inventory of inputs) to your current liabilities (operating loans, accrued interest, accounts payable and annual fixed loan payments) should be no lower than 1.3. A farm business is considered very healthy if the ratio is maintained at 2.0 or greater.

The current ratio is a good measure of liquidity, but it can vary substantially through the year as sales occur, bills are paid, family living or draws occur, new loans are taken out and old loans paid off and especially as prices of unpriced grain and livestock inventory fluctuate. An analysis of 2,272 Minnesota Farms submitting their January 2014 data to FINBIN at the U of M Center for Farm Financial Management revealed that on average their liquidity as measured by their current ratio was very good, standing at 2.0. However, only 4.9% of their current assets consisted of cash and 69% was grain or livestock. If the majority of the grain or livestock was not priced, their financial strength was vulnerable to further market fluctuations. The cash held by these same farms would only cover 39% of their fixed annual debt payments and only about one month of cash expenses.

Tight profit margin years are in the foreseeable future, so it's wise to keep a higher portion of current assets in cash than has been done in recent years for the average farming operation. It is also very important, if holding more grain and livestock in inventory, to protect the price of that inventory to reduce the variability of your liquidity through the year. Even though interest earned for cash held in the bank is at record lows, that is a separate issue from holding cash for business liquidity purposes. When cash is maintained as one of your significant short-term business assets, at least the value is established and locked in for managing your liquidity. A strong liquidity position has value in strengthening the long-term viability of a farm business.


Thursday, October 2, 2014

2014 Rent Workshops: What Is a Fair Farmland Rental Agreement?

By David Bau, Extension Educator

Negotiating a fair rental agreement that satisfies the land owner and the farmer is a challenge. In these Rent Workshops, Extension Educator David Bau will provide examples, fact sheets and worksheets to determine a fair farm land rental rate for both parties.

The workshop will cover:

  • Farmland rental rate trends

  • Land values

  • Increasing input costs

  • Landlord worksheet

  • Tenant worksheet

  • Fair rent program

  • A rental rate that works

  • Flexible leases

  • Rental lease examples

  • What is a fair rental agreement?


Who should attend?

  • Landlords and farm land owners

  • Farmers and tenants

  • Agri-businesses

  • Ag professionals

Rent Workshop Schedule

11/5/14North Mankato9:30 amSouth Central College Conference Center
1920 Lee Blvd, North Mankato 56003
11/5/14St. Peter

2:00 pmCommunity Center

600 S. 5th street, St. Peter, MN 56082
11/6/14Cologne9:30 amCarver County Public Works Building
11360 Us Hwy 212, Cologne, MN  55322
11/6/14Shakopee2:00 pmScott County Law Enforcement Center
301 Fuller St. S., Shakopee, MN  55379 
11/7/14Worthington9:30 amExtension Regional Office
1527 Prairie Drive, Worthington, MN 56187
11/10/14Farmington9:30 amDakota County Extension Center Conference Room
4100 220th St. W, Farmington, MN 55024
11/10/14Northfield2:00 pmNorthfield Public Library

210 Washington Street, Northfield, MN 55057
11/13/14Le Center9:30 am4-H Building Le Sueur County Fairgrounds
Hwy 99, Le Center, MN 56057
11/13/14Lake Crystal2:00 pmAmerican Legion Post 294
County Road 20 South, Lake Crystal, MN 56055
11/14/14Alexandria9:30 amDouglas County Public Works Building
526 Willow Drive, Alexandria, MN 56308
11/14/14Alexandria1:30 pmDouglas County Public Works Building

526 Willow Drive, Alexandria, MN 56308
11/17/14Winona9:30 amWinona County Office Building Room 102B
202 W. 3rd St., Winona MN 55987
11/17/14Preston2:00 pmFillmore County Office Building
902 Houston St. NW, Preston, MN 55965
11/19/14Willmar9:30 amMid Central Research & Outreach Center
1802 18th St. NE, Willmar, MN 56201
11/19/14Madison2:00 pmLac qui Parle County Annex
422 5th Ave., Madison, MN 56256
11/20/14Winthrop9:30 amUnited Farmers Coop Main Office
705 E. 4th St., Winthrop MN 55396
11/20/14Sleepy Eye2:00 pmBrown County Extension Office
300 2nd Ave. SW, Sleepy Eye, MN 56085
11/21/14Greenwald9:30 amGreenwald Pub
310 1st Ave. N., Greenwald, MN 56335
11/21/14Foley1:30 pmMr. Jim's
840 Highway 23, Foley, MN 56329
11/24/14Caledonia9:30 amCriminal Justice Center
306 South Marshall St., Caledonia, MN 55921
11/24/14St. Charles2:00 pmSt. Charles City Hall
830 Whitewater Ave., St. Charles, MN 55972
12/1/14Marshall9:30 amLyon County Government Center
607 West Main St. Rooms 4 & 5, Marshall, MN 56258
12/1/14Pipestone2:00 p.m.Minnesota West Room 127
1314 North Hiawatha, Pipestone, MN 56164
12/3/14Jordan9:30 a.m.
Scott County Extension Office
7151 190th West, Jordan, MN 55318
12/3/14Chaska2:00 p.m.Carver County Government Center EOC
606 E. 4th St., Chaska, MN 55318
12/4/4Austin9:30 a.m.Mower County Courthouse East View Room 201
1st St. NE, Austin, MN 55912
12/4/14Albert Lea2:00 p.m.Freeborn County Government Building
411 S. Broadway, Albert Lea, MN 56007
12/5/14Morris9:30 a.m.West Central Research and Outreach Center
46352 State Hwy 329, Morris, MN 56267
12/5/14Willmar2:00 p.m.Mid Central Research & Outreach Center
1802 18th St. NE, Willmar, MN 56201
12/8/14Slayton9:30 a.m.Murray County Fairgrounds 4-H Building
3048 S. Broadway Ave., Slayton, MN 56172
12/8/14Lamberton2:00 pmSouthwest Research & Outreach Center
23669 130th St., Lamberton, MN 56152
12/9/14Hutchinson9:30 amHutchinson Event Center
1005 Hwy 15 S Plaza 15, Hutchinson, MN 55350
12/9/14Gaylord2:00 pmSibley County Courthouse Annex Basement
400 Court Ave., Gaylord, MN 55334
12/10/14Blooming Prairie9:30 amBlooming Prairie City Center
138 Hwy Ave. S., Blooming Prairie, MN 55917
12/10/14Rochester2:00 pmAuditorium UCR-Heintz Center
1926 College View Road SE, Rochester, MN 55904
12/11/14Little Falls9:30 amInitiative Foundation
405 1st Street SE, Little Falls, MN. 56345
12/11/14Browerville1:30 pmBrowerville Community Center
Main St. & W. 2nd St., Browerville, MN 56438
12/12/14Waseca9 a.m.Starfire Event Center
204 2nd Street, SW, Waseca, MN 56093
12/17/14Rochester9:30 amAuditorium UCR-Heintz Center
1926 College View Road SE, Rochester, MN 55904
12/17/14Owatonna2:00 pmSteele County Community Center
1380 S. Elm St., Owatonna, MN 55060
12/18/14Buffalo9:30 amWright County Courthouse Room 120
10 2nd St. NW Room 402, Buffalo, MN 55313
12/18/14Litchfield2:00 pmFamily Services Building

114 North Holcombe Ave. Room 200, Litchfield, MN 55355
12/19/14Olivia9:30 amRenville County Government Service Center
Rooms 116 & 117, 105 South 5th St., Olivia, MN 56272


Wednesday, October 1, 2014

Farmland Rental Rates for 2015 that Work for Both Parties

By David Bau, Extension Educator

I have completed two of 44 farmland rental workshops with most scheduled for November and December. The budgets for 2015 are ugly using current 2015 forward contract prices offered with both corn and soybean budgets in the red. Corn is negative by more than the average rent paid in 2014 and the farmer receiving no labor and management payment. The 2013 average rents in Southern Minnesota were $243 in the FINBIN database and the data provided by the Minnesota Agricultural Statistic Service in September listed the average rents as $227 per acre in 2013 and $237 in 2014.

Today's 2015 forward contract corn price is $3.27 and soybean price is $8.84. The record corn and soybean prices of recent years have significantly impacted land rents. Crop production expenses, farm profits and cropland rental rates all increased during the recent golden era of farming. Projected average input costs for 2015 based on adult farm management numbers for Southern Minnesota in the FINBIN database project to $639 for corn and $306 for soybeans before paying rent and paying no income for farmer labor and management. The numbers are in the red, using 180 bushels of corn per acre at $3.27 per bushel provides a gross income of $588.60 compared to $639 expense leave a loss of over $50 per acres before paying any rent. Using 50 bushels for soybeans at $8.84 generates $442 gross income, leaves $136 after $306 of expenses, to share between the farmer for labor and landlord for rent.

Last month I examined the last time average corn and bean prices fell compared to the previous year 2009 compared to 2008 prices to determine if land rents moved lower as commodity prices fell. The data indicated no decline in farmland rental rates, although commodity prices rebounded the next year to higher levels. Using $250 for an average rental rate, a farmer would receive no income for labor and management and have a loss of $300 per acre for corn and a loss of $114 per acre for soybeans. In a 50-50 crop rotation, the loss would average $207 per acre for the farmer.

Examining the numbers in another way, if a farmer wanted to farm for free and have no income, they could afford to pay $43 per acre rent, in a 50-50 corn soybean crop rotation. Anything over this amount would come out of the farmer's pocket. Budgets should also be impacted by new farm bill with payments if prices remain at low levels. In order for to cover rents and $60 labor charge per acre, the corn price would have to reach $5.27 and soybeans $12.32 per bushel using the projected average input costs for 2015.

So what is a fair rental agreement? Usually it is an agreement where the landlord receives a fair rental payment and the farmers receives a fair profit. In the above scenario neither the farmer nor the landlord think the numbers are fair using $43 for rent and no income for farmer. Farmland sales in Minnesota increased by over 22% from 2012 to 2013, this has caused property taxes to increase as well for landlord.

So how do you approach this troubling situation? Start by agreeing to a lower base rent up front and then add flexible components. If yield are better than average both parties should benefit. If prices improve from these harvest lows, both parties should benefit. If a farmer can maintain yields with lower input costs, both parties should benefit. These can all be components of flexible lease agreement.

The last time prices declined significantly from previous year was 2009. If prices remain at these current lower levels, how long before rents begin to decline and approach the 2009 average of $168 or the 2010 average of $169 per acre?

Make plans to attend a farmland rental workshop this fall for current numbers. Check out the Agricultural Business Management calendar for schedule of the rental workshops at: http://www.extension.umn.edu/agriculture/business/ for specific times and locations.


Record Corn and Soybean Prices Gone, Now What?

By David Bau, Extension Educator

The record corn and soybean prices of recent years now look like a memory with much lower current prices and future market prices. Crop production expenses, farm profits and cropland rental rates all increased during this golden era of farming. Since the beginning of 2014, forward contracting prices for corn and soybeans have averaged $3.98 and $10.86 respectively. On the table below, you can see these prices are well below the last few years but above the 12 year average. The first two columns indicate the average price for corn and soybeans starting with forward contract price at beginning of year and going through September 30th of the following year a 21 month period. The next two columns list the cash prices starting at harvest (October) in calendar year and going the September 30th of the following year, 12 months. The next column lists the average rate for southern Minnesota cropland rental. The last column lists the average price as a percent of $4.00 corn and $10.00 soybeans.

bau2.jpg

As the indicated in table, rents have not gone done since 2002 although increasing only $1.00 from 2010 to 2011. This was two years after prices had fallen in 2009 as only 88% of $4.00 corn and $10.00 soybeans. The ten averages were $4.04 for corn and $9.90 for soybeans. Current new crop fall of 2014 cash corn price is $3.26 and $10.11 for soybeans in Worthington and since the beginning of 2014 corn has average $3.98 and soybeans $10.86 which is an average of 104% again lower than in 2013. The last time the average price was in this range was during 2007 and 2008 when rents averaged $125 and $147 respectively.

If prices remain at these current levels, how long before rents begin to decline and approach the 2008 averages? If the 2009 price decline is an example of a timeline, it may take up to two years to see average rental rate decline. At current prices with average yields farmers on average could lose over $185 per acre on corn and make a small profit on soybeans based on the average rent of $243 listed for last year.


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