Management Sessions Offer Financial Perspective for 2010

Learning session at Commodity Classic closes out the meeting offers in-depth financial insight.

Published on: Mar 8, 2010

These days in farming, it often feels like nothing's under our control. We can't control the weather, the markets, or the cost of fertilizer. The final Learning Center Session of the 2010 Commodity Classic focused on "Controlling What You Can Control" financially. Farm Progress Companies and management firm Waterstreet Solutions teamed up to put together the two-hour event in Anaheim, Calif.

The 2-hour session, hosted by Max Armstrong, broadcast director, Farm Progress, included a diverse panel of experts experienced in helping farmers on the financial side of farming. Arlan Suderman, market analyst, Farm Futures, challenged growers in attendance to understand what they do well and where they need help in their operations and then bring those partners on board. Suderman suggests that 2010 will be a challenging year with a lot of volatility in crop prices and input prices. He says an individual needs to have a business mindset, know what their costs are and be able to separate their emotions from their marketing plan. The best approach is to have a plan and be ready to act on it, noting the 2010 price spikes will be quick and big and short in duration. If growers have the opportunity to capture some of those, 2010 is a year where they could grow equity in their operations.

Suderman shared research out of the University of Nebraska, where they studied the personality types of 4,000 growers. They determined that only 25% of growers had the personality type and the skill set to be able to detach from the emotions of having produced a crop to be able to market it effectively.

On the topic of succession planning, Suderman says often when there is a plan, it's all financially focused. He suggests growers make sure to hand off management of the farm as well, to be able to give the next generation that experience. Sometimes, that means allowing them to make mistakes and learn, so that they're ready when it comes time for them to completely inherit the operation. Suderman notes that kind of planning is critical to insure the success of the farm into the next generation.

Tim Copeland, vice president of marketing, Great American Insurance, also a panel member, shared recent figures from the USDA's Risk Management Agency, showing 82% of corn acres and 83% of soybean and wheat acres are insured. Of the acres insured, 80% of the corn acres are insured under a revenue product and 70% of the soybean and wheat acres are insured under a revenue product. Copeland says with premium subsidies, enterprise unit discounts and the expansion of biotechnology endorsements, farmers should be able to purchase a good insurance program at a reasonable rate that would allow them to market their crops better. He says some major changes are coming with crop insurance in the 2011 growing season, including a proposed 5% reduction in subsidies.

Mike Jacobson, Chairman, president and CEO, NebraskaLand National Bank, North Platte, Neb., and current chairman of the Nebraska Bankers Association was also a panel member. One of his key points was that farmers should not be making purchase decisions based on a CPA's advice around tax time. He says typically their key goal is only to save on taxes, which doesn't always send a grower in the right direction with regard to having the right amount of working capital and achieving other financial goals.

Jacobson says a concept that is incredibly important for producers to understand is that to repay loans with profits. Farmers don't repay them with net worth. He suggests growers shouldn't ever confuse the two. He said bank regulators are concerned with profit. Jacobson says a borrower with two years of back-to-back of losses is probably heading toward a sub-standard classification from a regulator's point of view and the only thing that will save them is having a fair amount of working capital ongoing.

Jacobson says he's a huge proponent of federal crop insurance, calling it one of the best risk management tools delivered to farmers by the federal government, and he says it's one of the few times that the government was actually here to help farmers and did. Jacobson says federal crop insurance has allowed younger producers to handle the volatility that we're dealing with in agriculture today

Jacobson says if you look at your total expenses for the coming year - including family living expenses, principal payments on term debt, down payments on capital expenditures, and operating expenses and subtract what you could get from crop insurance if your crop was a total loss, the difference needs to be made up with working capital. He says if you don't have that and you have carryover debt at the end of the year, regulators look at that as a bad sign. Jacobson says it's a lot easier to have the cash in hand and pay interest on long term debt. He says equity in real estate is not going to help in a loss year.

Jacobson says the time to put long term debt in place is when you have strong asset values, good fundamentals and relatively low interest rates – which is right now. If you're looking at protecting risk on interest rates, now would be a great time to be making those moves.

Darren Frye, President and CEO of Water Street Solutions, was the final panel member. He said a lot of farmers still feel that using financial tools like futures and options is risky – like gambling in Las Vegas. Frye contends that the real gamblers today are those that aren't using the tools for risk management. He says you can't lose the farm if you're hedging risk, but you can lose the farm if you're speculating. He says farmers often feel intimidated by marketing tools when they are not understood. Frye challenged growers to be learners and not to enter contracts they don't understand. Frye adds that growers need to evaluate past plans to reflect and learn from them, and that you learn the most from your failures.

The panelists were asked what separates the successful growers from the rest. Frye quoted Texas A&M Professor and Extension Economist Danny Klinefelter who says there's no silver bullet. He says the really successful producers merely do everything 5% better. He says they produce 5% more bushels, sell them for a price that's 5% higher and spend their capital 5% better.

Segments from the session were videotaped and will be shared on Farm Progress Web sites in the coming weeks.