Cash flow is key when it comes to farming, in fact, Cash is King!
Farmers are proud to be landowners, establishing and growing farms that can be passed on through generations. The concept of growing crops on your own soil ignites feelings of pride, community, and tradition. Many farmers also consider land investment to be their retirement fund. However, in a recent Western Producer article, Scott McEwen, an alternative asset value expert, argues that prioritizing land ownership may not always be in a farm’s best interests. McEwen argues that prioritizing land investment ties up a farm’s capital, often leaving farmers “land rich but cash poor”. These long-term land assets can keep farmers from investing in technologies which modernize operations and maximize efficiency. This blog discusses some considerations for farm cash flow management, and whether or not McEwen may just be right about land purchases.
Managing cash flow is essential in farming where the majority of cash inflows for the industry come seasonally when grain or livestock are sold. Expenses can’t be delayed, as inputs and other expenses need to be paid for throughout the year. Not only is it important to have cash reserves for unanticipated expenses, but having a healthy cash flow allows for continuous investment in farming operations, facilitating growth and increased efficiencies. Positive cash flow also creates the opportunity to buy or lease new land when it unexpectedly becomes available. Cash flow management is especially important in 2020 when farmers are dealing with the Covid-19 pandemic. Over 70% of farmers in the recent Agricultural Producers Association of Saskatchewan survey expected Covid-19 to have a negative effect on cash flow due to volatile markets, difficulty moving grain, and other uncertainties.
Having the majority of farm assets tied up in land can strain a farms cash flow, as it is not a liquid asset you can easily or quickly get cash from. For this reason, having cash flow tied heavily in land could potentially lead to difficulties paying bills or carrying-over short-term liabilities from period to period. It turns out when it comes to farming, cash flow is king. The most successful farms know how to make their cash ‘flow’ when they need it and not be blocked from innovation or success by inflexible or non-liquid assets.
Purchasing farmland has become increasingly difficult in recent decades. Saskatchewan land prices have increased at an average annual rate of 7.4% in the last 25 years. However, the recent annual increases from 2017-2019 ranging from 6.2% – 10.2% might be considered low compared to 19.7% – 22.9% seen from 2011-2013. With land costs ranging from $800 – $3900 per acre in 2019 ($CDN), 160 acres would cost anywhere from $128,000 – $624,000! When you consider the additional interest costs, loan fees, life insurance, and collateral, not to mention land taxes, the costs just keep increasing.
With all of these costs, it’s no wonder that between 2011 and 2016, rented Canadian farmland increased by 9%. Despite the improved feasibility of renting over purchasing land for many farmers, the argument can be made that purchasing is a long-term investment, and renting is simply an expense. Increased efficiencies or emotions may also play a role in a farmer’s decision. If land becomes available bordering a farmer’s property, or belonged to family, or even contains sentimental value, the benefit of purchasing may extend beyond simply the dollars and cents of the transaction.
The decision of whether or not to purchase land is an important element of cash flow management. Oftentimes purchasing land is in a farms best interest, and other cash flow management strategies need to be considered. While cash can be made from the sale of crops and livestock, there are other alternatives to help keep the farm from going in the red. Off-farm income can help supplement farm income during times of restricted cash flow or when planning for capital investments. Selling unproductive or unnecessary assets can also provide a helpful cash boost. The CCGA Cash Advance program provides an excellent opportunity for farmers to manage cash flow with zero or minimal interest. Most farmers are well acquainted with turning to creditors to help obtain farm assets, and of course, personal expenses can be minimized. However, farmers may not be keen on spending their precious time at an off-farm job, selling off assets, or taking on more debt. So, are there alternative options to manage cash flow?
One idea for increasing cash flow is to seek outside investment by selling shares. In the organic produce market, an organized process known as ‘Community-Supported Agriculture’ or CSA provides funds for farmers in the spring through consumer purchase of a ‘share’ of the harvest. The funds allow farmers to purchase inputs and pay for expenses throughout the growing season and ensures a buyer for the years harvest. Consumers benefit by receiving fresh produce without having to visit the farmers’ market, creating a mutually-beneficial relationship.
Though CSAs are typically implemented for vegetables, the Creston Grain CSA in the Kootenay Valley of B.C. is an example of a CSA which offers organically produced grain, including wheat, oats, and lentils, by selling full (100 lbs.) or half (50 lbs.) shares in the spring. Although the average consumer may not be interested in delivery of 50-100 lbs. of grain, the opportunity is exciting for innovative consumers who have invested in processing technologies such as flour mills or oat flakers. Farmers receive cash flow early to help manage seasonal operations, and consumers are guaranteed delivery of their chosen products. A similar business strategy could be implemented for conventional grain farmers. This direct farm-to-consumer business strategy, though not a fit for every farm, offers a unique opportunity to manage cash flow while guaranteeing a buyer for a portion of the harvest.
Alternatively, perhaps the opportunity exists for farmers to sell shares of their corporation to the public. Instead of receiving payment in the form of grain, shareholders might receive cash dividends at the end of the year. Though this is a common method for paying oneself from a farming corporation, receiving external investment as a method of managing cash flow is not a common practice. Yet, maybe in the future more farms will turn to external investors to balance cash flows throughout the year.
No matter the stage or size of a farm, one thing remains true: cash is king. Cash flow is necessary to seize investment opportunities, face unexpected financial challenges, and improve farm efficiencies. If a farmer has ran the numbers and investing in land makes economic sense, it can be an excellent opportunity to expand farm equity and scale. However, if purchasing land will leave a farm strapped for cash for years to come, perhaps the purchase should be reconsidered. Bringing in outside investors is a novel idea which might be just what a farm needs to grow equity in machinery or other technologies. Though every farm is different when it comes to cash flow needs and investment decisions, the ever-changing industry of agriculture provides many opportunities for farmers to manage their cash in the way that suits them best.
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Thank you for the well written article. It is obvious that you are writing from experience. As a farm realtor, I deal with these issues from a unique vantage point.