Production agriculture today is extremely volatile; sensitivity analysis should also be completed to evaluate the ﬁnancial stability of the operation. Examples of changes to measure sensitivity are an increase in expenses, decrease in revenue or increase in interest rates. To measure sensitivity, one should shock revenue or expenses by 5 or 10 percent and interest by 3 or 6 percent. Net farm income is then evaluated to see where the farm’s proﬁt level is after each change. More detailed analysis can include speciﬁcally shocking or changing commodity prices or input prices to evaluate the impact of speciﬁc factors. Can your operation sustain a decrease in revenue due to changes in prices or yields and to what degree?
With proper ﬁnancial analysis and planning, one can prepare an operation to be ﬁnancially stable and successful for years to come. Additional information on ﬁnancial statements and analysis is located on the Ag Decision Maker website.