Publish Date: March 21, 2023
Every business knows managing your margins is crucial to your success, and your farm operation is no different. There are two typical ways to improve your margins – increase revenue or decrease costs. Although it may seem simple, making the right decisions to see movement either way can be difficult.
“With rising interest rates, high input costs, and market uncertainty, margins will start to get tighter over this next year,” explained Megan Niewoehner, Ag/Commercial Loan Officer at Fidelity Bank & Trust. “Not only is it important to consider strategies to manage your margins, but also to build a relationship with your lender. This gives you the opportunity to gain industry insight on recent changes and financial assistance programs you may qualify for. Did you know FSA recently announced the Pandemic Assistance Revenue Program (PARP) accepting applications until June 2, 2023?” added Megan.
Megan details 6 strategies for farmers to consider to keep their margins in check:
- AVOID CASH SHORTAGES
Make sure to understand how much cash is required to meet the financial obligations of your operation such as paying bills, suppliers, employees, etc. Once you determine your cash flow needs, you may want to consider protecting your working capital which is your current assets minus your current liabilities. It is also a good idea to work closely with your lender to arrange for an operating credit line ahead of your immediate need.
- DIVERSIFY INCOME
Diversification reduces your reliance on a single source of revenue which mitigates risk to your operation. The best source of diversification is finding revenue off the farm since outlets in the industry are highly correlated. For example, when corn prices are high, the cost to feed livestock are increased as well. Consider alternative sources of revenue with the assets you already own – custom work, snow removal, transportation needs, etc. By diversifying your income, you can take advantage of new markets and/or opportunities, and in turn, improve your overall financial stability.
- ACTIVELY MANAGE RISKS
Not only does risk management enable a business to prepare for unforeseen events, it can also help a business identify opportunities for growth and improvement. Once you identify potential risks and assess their likelihood and impact, develop a plan to mitigate the identified risks. Your plan should include marketing tactics, crop insurance, and diversification of income among other things. Once you have a plan, it’s important to review it regularly to ensure it remains effective and profitable in the volatile ag industry.
- SECURE REPAYMENT CAPACITY
Aggressively paying down debt is typically a good strategy; however, in a rising rate environment, consider applying any additional funds to your operating line of credit or other loans with a higher interest rate. This strategy may help the cash flow needs of your farm operation. Discuss options with your lender since they have a good view of the finances for your entire operation.
- KNOW YOUR SUPPORT PROGRAMS
Whether it is a local or a national resource, it is best to take advantage of the programs available to you so you’re not leaving anything on the table. Federal crop insurance is a big safety net, but don’t forget about farm bill programs, like ARC and PLC, that provide support when revenues or prices fall. Conservation programs, such as EQIP and CRP, provide funding for select conservation practices and disaster aid programs, such as WHIP+ and the Emergency Farm Loan Program, are available after natural disasters. FSA can be another great resource and support program.
- TALK TO YOUR LENDER
Your lender wants to see you succeed as much as you do. Considering the importance of finances in your operation, being honest, timely and transparent in your goals and future plans is critical to your success. The earlier you talk with your lender, the more options will be available to you.
In honor of National Ag Week, we salute our farmers and friends in the fields! At Fidelity Bank & Trust, we know agriculture is an essential part of the communities we serve and we are proud to be Iowa’s third largest lender* in providing agricultural loans and services to our local farmers. Our experienced team has an understanding of the industry and is ready to discuss your operation. Stop by or call us for your financial needs!
* Source: Top 100 Farm Lenders Ranked by Dollar Volume, FDIC, Data as of 3Q 2022.
