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Vice President and Farm
Manager David Irwin at State Bank in Lincoln said the easy answer to
making money is to take in more money than you spend. However, Irwin
also said that is not a blanket answer due to many variables.
For example, the prices set at the Chicago Board of Trade and prices
at the local elevator are usually different. Farmers are “price
takers, not price makers” Many factors go into the difference
between the board of trade price and the price the farmer receives
at the local elevator, also known as the “basis.”
With low commodity prices,
Irwin said it can be hard to control what you are bringing in.
Other variables are connected to how long someone has been farming.
 In
this case, Irwin says, older, more established farmers may have
built up wealth and net worth and can come to him for working
capital “if their balance sheet allows.” Because they are
established, their costs of production could be less due to being
able to take advantage of some better discounts on inputs and not
having to borrow large sums of money to buy those inputs, therefore
saving on interest costs. These farmers are often able to offer some
collateral and restructure their balance sheet.
With younger farmers in their 20s to 40s, Irwin said, they may not
have as much working capital or flexibility to restructure their
balance sheets. They may also be paying more interest on loans.
Before deciding to consult with a bank about financing, there are
some issues to consider.
In “Are You Successfully Managing Farm Debt?” Shawn Williamson says
you should consider the following questions:
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Where can you get the best
rates?
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Should you choose
long-term or short-term financing?
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Fixed rates or floating
rates?
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What should you put up as
collateral?
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Which loans should be paid
off first?
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How much debt is too much?
If you need a loan,
Williamson says you should explore all financing options. Farm
Credit Services, local banks, national banks, and international
banks are some of the places you can get financing.
Figure out how to get the lowest interest rates and what to use as
collateral.
Another option is a home equity line of credit. This line of credit
can be useful as a source for emergency funding.
Scott Anderson provides more ways to ease your financial load in
“Six steps to ease the burden of debt.”
One way is to go to your local bank or Farm Service Agency to
discuss lower interest rates for refinancing.
To assist with cash flow, Anderson says you should “extend the terms
of the loan out as long as possible.”
If you have assets such as augers or other equipment you are no
longer using, sell it and make some money.
If you have extra space in your shop, consider renting space to
friends and neighbors who may need more storage.
Since you only use farm equipment a couple months a year, Anderson
says you could “rent out any unused machinery to help make the
payments.”
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Finally, Anderson suggests
offering services such as “custom planting” and “spraying” at a
lower price than others. Other ideas are to “clean driveways” or
“hay ditches.”
While you are trying to reduce
debt and make more money, there are several mistakes you should
avoid. The Agamerica article “Decrease Your Farm Production Costs by
Fixing these Five Common Mistakes” shares several tips for reducing
debt.
The first mistake the article mentions is “too much
diversification of seed purchases.” This problem may occur when
farmers go to a variety of suppliers and buy small quantities of
seed.
One fix is to “consolidate your seed purchases.” That can be done if
you buy from “the two or three highest performing brands or
companies” that offer what you are looking for. After that figure
out which places give you “the highest return on investment.” When
possible, negotiate discounts on these purchases.
The second mistake is “spending too much on chemicals such as
pesticides and herbicides.” This mistake can be corrected if you
evaluate, analyze and research “generic chemical alternatives.” The
most expensive chemical is not always the best.
The third mistake occurs when people buy unnecessary
machinery and equipment, which could cost them thousands of dollars.
Before making a purchase, it is best to evaluate whether you really
need to replace the equipment. You may be better off doing repairs
on what you have and postponing purchases.
The fourth mistake happens when people pay too much cash rent
on farmland. That can be corrected by talking to landlords to see
they are willing to “incorporate a flexible rent structure” and
lease.
The fifth mistake is “failing to minimize cash flow by
insufficiently paying off debt.” A fix is to “optimize your farm’s
balance sheet and restructure your farm’s debt.” Knowing your
financial standing can help you decide whether you may be able to
refinance loans.
Fortunately there are many options for lowering your debt. Knowing
the best options for financing, how to ease your debt load and
mistakes to avoid can help you reduce debt and bring in more money
As Scott Anderson says, “Debt is a stifling reality for any farm
operation, but as you can see, there are ways to wiggle out of it—or
at the very least, to keep your business afloat.”
Resources
Successful Farming “Are You Successfully
Managing Farm Debt?” by Shawn Williamson
Farm Progress “Six Steps to Ease the Burden of
Debt” by Scott Anderson
Agamerica “Decrease Your Farm Production Costs
by Fixing These Five Common Mistakes.”
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