Plan now for 2006

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Dairy producers are looking at reasonable milk prices for 2006. However, because of the effects of Hurricane Katrina and higher petroleum prices due to increased worldwide demand, expect your input costs to increase dramatically. According to David Kohl, professor emeritus of agricultural and applied economics at Virginia Tech, 80 percent of the inputs used on the average farm or ranch in North America will be affected by higher petroleum prices.

That means you need to do some planning now.

Crops
The crop production side of your operation will see the largest input increases. In fact, if you cash-rent land for crop production, the increased input prices may put you in the position of locking in a loss for 2006.  Higher prices for nitrogen and fuel, as well as increased costs for all of your suppliers, have drastically changed the economics of growing corn and silage.

What should you do? First, figure out where you are at today. Each farm, each rental arrangement, and each crop that you produce will be affected. You or your financial adviser should perform an enterprise analysis to give you a clear picture of the profitability of each sector of your operation. If you have a computer and an Excel spreadsheet, you can use a free enterprise-analysis spreadsheet from the University of Illinois Web site. You will find it under Fast Tools at:
www.farmdoc.uiuc.edu.

This program uses your farm records to determine your break-even income after variable operating expenses, as well as after-family living and term-debt service.  Another option tells you how much profit or loss each enterprise generates.

For most producers, the only way to survive 2006 will be to negotiate lower rental arrangements.  Don’t be surprised if your landlord is reluctant to lower the rent. However, since all parties need to be profitable in the long-run, the landlord will have little choice but to help you survive if he wants to continue to rent his land in the future. Pull together your budgets and sit down with your landlord to make sure you can make a decent living in 2006.

Financials
Take a hard look at your financial statement. Some producers have allowed their balance sheets to get “top-heavy,” with too much operating debt. Operating debts should be liquidated each year. Lenders like to see $2 of current assets for each $1 of current liabilities.          

A change in land prices could also affect your borrowing capacity. If cash rents or other rental rates are reduced, land prices will likely fall. If, for example, the value of a tract of land falls by $1,000, you have just lost the opportunity to borrow $650 against that land because lenders generally only loan up to 65 percent of the equity in land.

I suggest that you look at the monthly balance of your operating loan for the past 18 months. Consider refinancing the amount of your lowest monthly balance against the equity in your real estate before land prices decline. I also suggest that you consider refinancing any term-debt loans that mature more than two years from now in order to improve your cash-flow over the next few years to help you survive until prices or input costs change. You may have less equity 12 months from now with lower land prices, thus affecting your ability to refinance.

What happens if I am wrong?  Have your damaged your financial position?  The answer is “no”.  If cash flow is better than projected, just pay off your long-term debt faster.

Only the strong will survive the next two years.  Take steps today to make sure that you’re a survivor.

Darrell L. Dunteman is an agricultural financial consultant and accountant with offices in Bushnell, Ill.  Dunteman also edits Ag Executive, a monthly agricultural financial newsletter. You may contact him at agexecutive@earthlink.net



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