by Jason Fewell
In today’s farming environment, we hear a great deal about farm financial stress. Managing stress can be difficult, and everyone handles stress differently. Some people work harder, while others play harder; some turn to alcohol or drugs, and others let fate dictate their day-to-day activities.
To handle stress, each person needs to find something that works for them.
As a farm management instructor, I often talk about things that stress the farmers I work with. Most of the time it revolves around finances. Stress-proofing your farm or ranch is almost impossible, but planning to minimize stress when prices are low and expenses are high can make life easier. Farming and ranching are cyclical businesses.
We learn from experience, and getting through difficult times can hopefully teach us what to do when things improve and before the next downturn.
Here are six ways to better manage through this time:
1. Have a good working capital position. This is the best way to keep your operation resilient in hard times. The farmers and ranchers who get through difficult times with the least amount of stress have strong working capital built up during good times.
The difficult financial situation many operations are experiencing during this downturn that began in 2023 makes building working capital nearly impossible. However, having a plan and making good decisions can set up the operation for success before the next downturn.
2. Know your cost of production. This is one of the most important things to know on your farm. Keep track of direct and indirect costs per crop or livestock unit. Knowing this will help improve marketing and profitability. Profits turn into working capital.
Soil testing is important so that you don’t overapply or underapply crop nutrients, both of which can negatively impact profits. Likewise, apply chemicals in a cost-efficient way. Monitor weeds, diseases and insects in your fields, and apply crop protection products with profits in mind. Discuss this with your crop scout and agronomist.
3. Evaluate capital purchases carefully. It’s easy to make large capital purchases when profits are high. However, when prices fall, payments on equipment or land can become difficult to fit into a cash flow. If you are looking at making capital purchases when times are good and think it’s easy to pay for, you might want to stop and think about tougher times and reevaluate your decision.
4. Stress-test your cash-flow budget. What if there is a 10% increase in expenses? What if there is a 15% drop in crop prices and you’re not hedged? What if interest rates double? What if yields fall 20% due to some weather-related event?
Evaluate what happens to your cost of production per bushel, hundredweight, etc., and your income available for family living and debt service. Planning for these decreases even when prices are good and basing your decisions off lower returns can improve your financial position when returns do decrease due to something out of your control.
5. Consider other ways to make money. Difficult financial times might require taking an off-farm job. Maybe this is something you continue to do even when prices improve. If you’re able to get all the farm work done, an off-farm job provides extra income for family living expenses and allows farm income to pay for farm expenses. It also can help build working capital.
6. Evaluate family living expenses. Can the farm sustain your lifestyle? If not, figure out what you can cut. Saving some money on living expenses can help the working capital position to some degree.
Planning for difficult times can make your operation resilient when the downturns come. Study your operation during these difficult times to see what you are forced to change, and maybe continue these practices after the return of more profitable prices. Then think about the possibility of lower returns, even when everything seems to be going right, so you can handle the tougher times.
Fewell is a North Dakota Farm Management Education Program instructor at Lake Region State College and writes from Carrington, N.D. The program provides lifelong learning opportunities in economic and financial management for people involved in the farming and ranching business. Visit ndfarmmanagement.com; find @NDFarmManagementEducation on Facebook; or contact Madison Bodine, state supervisor of farm management education, at mbodine@nd.gov or 701-328-4567 for more information. The N.D. Farm Management Education program is sponsored by the North Dakota Department of Agriculture.