The government's involvement in agriculture has been difficult to read lately. Changes in attitudes about price supports and crop payments has me preparing my clients for life without them. Unless Congress makes some changes, the Freedom to Farm crop payments we have been receiving for the past few years will expire in 2002, and dairy price supports will end in 2000.
I first became alarmed about the effects of these changes when completing a client's 1997 tax returns. Government payments comprised between 40 percent and 50 percent of the net farm profit on the Schedule F for this sole proprietor farm. Other clients, involved in corporations and partnerships, often have their net profits made up entirely of government payments.
Calculate cash flow
What should you do to prepare your operation for 2003? First, figure out where you are and what your cash flow will look like after the loss of the government payments. Or, the possibility of milk prices dropping below the current support price of $9.90 per hundredweight.
An excellent tool is available free-of-charge if you have access to the Internet. You can get a complete cash flow program - to be used with Excel software - at the Web site listed below.
Use realistic prices, historical cost figures, and existing debt service to make projections for a future without government support. Don't forget to use realistic family living expenditures either. If you have a 115 percent positive cash flow (meaning that you have $115 of income for every $100 of required expenditures), economic research indicates that you will have the ability to handle cash flow surprises and survive.
What if your plan shows you are going to have problems? Don't bury your head in the sand and hope for a government bailout. You need to take some steps now to make changes before it's too late.
Limit operating debt
Take a look at your balance sheet. Do you have some equity in land that you could tap? Consider taking equity out of land by refinancing, and then lowering or eliminating operating debt. This will help your cash flow in coming years. You may not like the idea of tying up land with a mortgage, but your creditors could get access to your land if you fail to make payments on your operating loan. And, you'll probably get a lower interest rate on a land mortgage than an operating loan.
You may want to exercise this strategy as soon as possible to get the most equity out of your real estate. Land prices already appear to be slipping, lowering the amount of money you could access in the future. If I'm wrong, and the government does step in, just make additional payments on your existing debt.
You also need to take a good look at your existing farming operation. Are there some unprofitable enterprises draining cash flow? You'd better eliminate them now.
You may be able to liquidate some expensive real estate and improve your cash flow by leasing the property back from the new owner. Historically, land has only provided a 4 to 5 percent return to landlords.
Some operators may simply need to retire. The current price situation, coupled with the increasing average age of producers, is forcing some older operators to retire and create a new enterprise by drawing on their Social Security. I have had more farmers talk with me about retirement in the last 12 months than I have in the previous 12 years! If you anticipate financial trouble, you are better off getting out now and retaining some of you assets rather than watch your life's work erode.
This column may lead you to believe that I'm pessimistic about agriculture. Nothing could be further from the truth. Sure, we are going to have some bumps in the next few years, but the producers who survive are going to have great opportunities as other producers exit the arena. Take the time this winter to determine a strategy for your operation and be among the survivors.
Cash flow software
To get a free copy of the software, go to the Internet address:
Darrell Dunteman, AAC, is an Accredited Agricultural Consultant and accountant with offices in Bushnell, Ill.