By Brian Hefty

I have 2 primary jobs on the farm.  Job one is always to raise the best crop I possibly can.  Job two is to manage the financial side.  To put it in simpler terms, I want to make money with hard work AND by using my brain with paperwork.  If you are a young farmer, one of the things you will learn quickly is that farming is a big money business.  Not that farmers necessarily make lots of money on average, but it takes a tremendous financial investment in this profession.  The better you handle those dollars often means the difference between success and failure in the long-run.

Prepaying crop inputs is one of my best examples of how using your brain instead of your brawn can put you ahead.  Certainly, there is a downside to prepaying – putting your faith in a retailer to supply your products at the promised prices when the time comes, while that retailer has your money in the meantime.  The flip side, though, is too good to pass up in most cases.

There are 3 main reasons you should prepay every year:

  1. Savings.  Every retailer out there wants your business.  They all have early incentives to buy, pay, and even take product from their suppliers.  Typically, they pass these savings on to you.  What you will usually save amounts to about 12% APR, but many years we find seed and ag chem companies raising prices in-season.  By the time you figure the price increases, your 12% APR may be up to 15% to 25% APR.  The number one question to ask of your retailer is what happens if a price goes DOWN after you prepay.  At some retailers, you WILL get price protection, but be sure to find out BEFORE you prepay.
  2. Supply.  This has become a much bigger issue in the last 5 years.  Prior to 5 years ago, we rarely had supply shortages of anything, other than the plot winners on seed.  In the last 5 years, it has been common for most seed products to sell out by Thanksgiving, and for many ag chem products to sell out by President’s Day.  Don’t get me wrong.  There is always enough seed to plant every acre and enough crop protection products to control pests, but you may not get your first choice or even your third choice if you don’t prepay.
  3. Taxes.  Depending on your farm income each year, you may or may not need to prepay due to tax reasons.  If you don’t need the expense this year, you can always prepay to get the good savings and supply right after January 1.  If you want to lower your current tax bill and push it off temporarily, you will want to prepay before January 1.  Just make sure you prepay for specific products at exact prices and quantities.  Also, check with your tax accountant, but you may only be able to prepay up to half of your total expenses, including depreciation.  Let me give you a quick example of how prepaying and pushing your tax bill off to a future year can benefit you:
  • Let’s say you prepay $100,000 each year for 20 years, and we assume between income tax and self-employment tax, your tax rate is 35%.
  • If you had to pay that tax bill this year, it would cost you $35,000.
  • If instead you have to pay that $35,000 in tax 20 years from now, that means you get to use the money for 20 years.
  • If you have a 10% opportunity cost of money, you would turn that $35,000 into over $123,000 by year 21 even figuring you pay 35% tax on the increase each year.  Obviously, using that money for 20 years is a big deal.
  • Many people think there is something wrong with delaying your tax bill; but keep in mind the only way you get to do that is by paying cash for something.  When you put cash into our economy, that money turns several times.  My point is simply that the government encourages that.  By prepaying and pushing your tax bill off, you are doing exactly what the government wants you to do – putting your money into action in our country.