January is a time when farmers are typically doing paperwork looking back at 2015 ahead of the upcoming tax season.
What some might find is their books don't necessarily balance the way they want. The good news is, it's possible to make better decisions in a difficult ag economy if you have a clear understanding of where you're at financially.
"What I'm seeing happening right now is people in the habit of doing a FINPACK (software from the Center for Farm Financial Management) analysis," said Rob Holcomb, ag business educator for the University of Minnesota Extension Service, "including balance sheets and income statements, are really analyzing what happened in 2015. A lot of people are doing analysis, and unless they've got some special circumstances, farm returns are due on March 1."
Holcomb said the financial condition on farms is a mixed bag.
"We had people last year that had big trouble managing the tax bill," Holcomb said. "What led to this challenge was the buildup of $8 per bushel corn, which caused more trouble than first thought. You hate to be negative about it, but I knew it would cause trouble down the line, and that's what we're finding now."
ADVERTISEMENT
He said certain farmers were doing a lot to avoid paying some taxes, such as deferring income to the next year.
"They were also maxing out on pre-payments," Holcomb said. "The problem is, a lot of farmers were rolling these massive deferred tax liabilities forward every year, even though they're showing a loss. They may have a loss over the last couple years on their accrued farm income, but they still have this cash they have to deal with, because if they don't do it, they have a monstrous tax bill."
He said a lack of steady farm income leads to an obvious problem.
"The challenge is the recent lack of cash flow is such that they can't afford to have that big tax bill," Holcomb said. "In a sense, they've backed themselves into a corner with their tax problem. But that's not everybody. Some folks have been paying a little more as they go and didn't have a big aversion to paying taxes, I think those folks are in much better shape."
Holcomb said one of the big buzzwords in the ag industry is working capital.
"It's a current and intermediate cushion that the farmer has," Holcomb said. "The more working capital you have, the better. Unfortunately, we've been burning some working capital over the last couple years. That's probably the thing that lenders are getting the most squeamish about right now.''
The lack of working capital on some farms is a concern.
He's especially worried about young farmers.
ADVERTISEMENT
"When the $8 per bushel corn began coming down," Holcomb said, "some of the younger guys were paying ridiculous land rental rates to try and get their hands on some acres to work. The problem is they've got the least ability to weather out low prices because they don't have a lot of working capital. They have a cost structure that's not sustainable."
Rents are beginning to come down, but they have a ways to go to ensure profitability for both farmers and landowners.
"Rent is the largest input cost for corn and soybeans," said Dave Bau, University of Minnesota ag business management educator in Worthington. "Rents are going down, but at current corn and bean prices, they should be around $100 to $125 an acre. Even base rents on flexible leases are still much higher than this."
There is still pressure on farmers for land rents to remain very high for at least one more year.
"Farmers are doing more and more flexible agreements with a base rent and additional rent if prices improve," Bau said. "With other input costs not coming down significantly, break-even prices for corn are $3.80 to $4 for corn and $9.50 to $10 for soybeans."
What's the key to surviving the downturn in 2016?
"I think the number one thing is you have to get your cost structure in line," Holcomb said. "Land rent is one of those high costs that can be negotiated — $400 land rent won't work right now."
One of the best things farmers can do is figure out where they're at financially before they make decisions on the year ahead.
ADVERTISEMENT
"The farmers I fear for the most are the ones that aren't doing any kind of financial analysis," Holcomb said. "They have no idea where they're at. It's a sad situation when they find out they're in trouble, and it's their banker that tells them."
