Crop farming has been profitable over the last five years, thanks to high grain prices.
Many producers took those profits and invested heavily into their operation, which caused the fixed costs of most farms to increase significantly.
These fixed costs include:
- higher debt levels from financing new assets such as land, buildings and equipment
- rising land rental costs as the demand for productive land in-creased in times of high prices
Crop prices have dropped significantly this fall because of the outlook of a large crop in the United States. Producers are questioning if it is the beginning of a shift toward low prices.
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Producers may now need to re-evaluate their operations to protect their competitiveness in a time of falling prices.
One production cycle a year is one of the advantages of grain farming. Operations have the ability to adjust before the next production cycle starts.
The time between harvest and the beginning of the next production cycle in the spring provides six months of operational analysis. Producers can evaluate their operations and make adjustments to become more efficient.
Other industries face much shorter production and adjustment cycles, such as the hog industry, where farmers produce and sell every month. Shifts in prices can dramatically and quickly affect their bottom line.
Producers need to examine their operations in the context of lower prices once harvest is complete and take steps to minimize future risk:
- Begin by reviewing your operation’s cash flow. With today’s lower crop prices, does the farm generate enough cash and have adequate operating credit to put in next year’s crop?
- Evaluate long-term commitments. Land or equipment rental arrangements that are priced to reflect the previous high prices may need to be re-evaluated now that prices are on a downward trend.
- Does the farm have the ability to service debt today and into the future? For some operations, lowering fixed costs will be necessary to ensure profit.
- Do you need to restructure your farm finances? Some operations won’t be able to sustain their current payment levels with lower profit margins. Lengthening loan amortization allows the farm to conserve cash and carry an operation through several cycles of decreased prices and profits.
