By Brian Hefty
The last few years on the farm have been pretty good in most areas. Certainly, if you need to get some tiling done to improve your drainage or if you were involved in the drought in the southern U.S. this year, your crops may not have been very good, but most farmers overall are pretty happy.
My Dad and I were at a farm event recently, and one of the first comments my Dad made when we pulled in was, “Look how every farmer is driving a new pickup.” Of course, I was sitting in Dad’s new pickup at the time, too.
Anyway, here’s my point. New pickups probably don’t make your farm a lot of money each year, nor do new boats, campers, home additions, landscaping, motorcycles, snowmobiles, guns, or cars. Sure, they might be fun, and you might really want them, but let’s talk a little about short-term and long-term on the farm first.
If you don’t know exactly what to do with your excess cash in the short-term, the very best investment you’ve probably got year-in and year-out is prepaying expenses. With seed and ag chemicals, depending on your supplier, it’s pretty much a guaranteed 10% to 18% APR investment. There are prepay deals now as early as September each year. Let me put this into dollars and cents using $200,000, a 1% per month discount (that’s just over 12% APR), and a May 31 date that we’ll call “in-season” as a quick example for a total seed and chemical bill for the year:
Example Seed and Chemical Bill
Buying in-season: $200,000
Buying by March 31: $196,000
Buying by Dec. 31: $190,000
Buying by Sept. 30: $184,000
Now let’s talk about interest rates. Let’s say you borrow $1 million on average for an entire year. If you can borrow at 4% APR instead of 5% APR, for example, that’s an additional $10,000 per year.
Here’s where I’m going with all this. Many farmers tell me they’re out of money every fall, so they can’t prepay as early as they should for the guaranteed return they’ll get on seed and chemicals and the likely return they’ll get on fertilizer and buying equipment early. Think this through for a second. What all these people are really saying is, “I NEED A BIGGER CREDIT LINE.” Believe it or not, banks are DESPERATE to loan money out right now TO PEOPLE WHO CAN ACTUALLY PAY THEM BACK. Ag loans are performing well, so bankers will most likely loan you more money IF you have a great balance sheet, a proven history of profitability on your farm, and you have a good plan to use that money.
All I want you to do is consider having more in-depth discussions with your banker about the capital you really need to not just survive on the farm, but to really grow your profitability. If your financials look great, which hopefully they do, there may not be any reason why you can’t have a better interest rate and a bigger line of credit, even though you may only need that extra borrowing power for a short time.
Farming is big business, even if you don’t have a lot of acres. It takes capital, commitment, agronomy know-how, and some heavenly intervention to do well. Because the dollars are a lot more than they used to be, it also takes good financial management by you. I’m not saying hoard all your money and take it all to the grave with you (seriously… if you’ve got the cash and really want a new pickup, buy it), but I am saying that you need to make sure you look at all the angles on how you can put your cash to work. What this will do for you in the long-run could be huge. The good times in agriculture probably won’t last forever, but if you can build up a nice base over the next few years, you will definitely be in a better position if tough times come back again.