NEWS for North Dakotans
Agriculture Communication, North Dakota State
University
7 Morrill Hall, Fargo, ND 58105-5665
March 19, 1998
Part II in the Series: "Tough Times Call for Financial Management Actions"
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
The balance sheet or financial statement is used to measure the financial well-being of your farm or ranch and help you determine what special financial management actions are required to keep your business financially sound.
In my last Market Advisor I presented a simplified balance sheet and five key early warning financial indicators. In this column, I will present a table of financial benchmarks for Northern Plains Cow-Calf Producers, based on North Dakota's Farm Business Management Record Summary for 1996 producers.
I have sorted these benchmark cow-calf farms by net farm income and have averaged the financial benchmarks for the 20 percent of low-profit beef farms, the average of all farms and the 20 percent of high-profit farms. You are encouraged to compare each of your farm's or ranch's financial well-being measures to the benchmark herd averages.
First, look for your business strengths by determining the high-profit financial measures that your numbers match or beat. Pat yourself on the back and make a special effort to capitalize on these business strengths. Second, look for your business weaknesses by seeing which low-profit financial measures beat your numbers. Take each weakness in your business and focus on the changes needed to remove that weakness.
If you take this comparative analysis seriously, it will prove a powerful, management tool.
Let's assess the magnitude of financial stress in your business. If your percent in debt (benchmark financial indicator number 13) is below 40, your business is not experiencing financial stress. If your percent in debt is in the 40 to 70 range, your business is experiencing some financial stress. If your percent in debt is over 70, your business is in severe financial stress.
Multiple years of low beef prices, low wheat yields and now low wheat prices are taking their toll on North Dakota's diversified beef cow-calf producers. Cash-flow problems from low prices, snowstorms, crop diseases, and now open heifers and cows, are making it difficult for some North Dakota farmers and ranchers to project a positive cash flow in 1998. Bank examiners are pressuring loan officers to loan only if the farm or ranch projects a positive cash flow. Without a projected positive cash flow, many bankers will be unable to issue operating loans.
Cash-flow projection problems are an early symptom of more serious financial stress to come. As any one year's operating debt is rolled into the next year's term debts, the overall financial structure of the farm or ranch business deteriorates.
Generally, a farmer's or rancher's first response to financial stress is to try to farm or ranch his or her way out of the problem, but it is not at all clear that one can successfully do this today. Today's profit margins per unit of production are just too small to pay multiple-years' production costs.
The 1980s demonstrated that removing financial stress typically requires a deliberate financial response, rather than a farming or ranching response. The two most common management actions required to remove financial stress are 1) restructuring of debt by increasing the repayment years on loans and 2) selling assets to pay down debts.
Your first management response to financial stress should be to evaluate your potential for restructuring debt. Restructuring debt involves stretching out the repayment time—for example, moving operating debt, that was scheduled to be paid back in one year, to a multi-year term debt. Another example would be moving intermediate-term debt to long-term debt. Some farms and ranches will be able to restructure while others will not. Your banker will be able to help you determine if you can restructure. In any case, restructuring debt needs to be your first response to financial stress.
If restructuring does not work, your next management action should be to explore the selling of assets to pay down debts. Farmers and ranchers acquire assets in the good times, and it should also be reasonable for these same farmers and ranchers to sell off assets in the tough times. Many, however, will only sell assets as an absolute last resort. Often this delayed last-resort selling leads to little or no final equity for the producer and his family.
The number one requirement for successful reduction of financial stress is to act soon enough. Prolonging the financial stress for two or three years by trying to farm or ranch one's way out of the problem generally leads to less and less family equity in the end. Typically, the longer the financial management decisions are delayed, the lower the family equity in the end.
Some farmers and ranchers are too busy farming and running cows to measure and monitor the financial well-being of their businesses—or at least that is what they think. Without complete financial management records, they do not receive the early warning signals. If things turn bad, they just continue working harder at farming or ranching until the banker says no. What is often missed in this busy world is that farmers and ranchers have to continually monitor the financial well-being of their businesses so that they can continue to do what they like to do best—farming and/or running cows.
Beef farmers' and ranchers' interest in financial management seems to only rise during the 10-year low in the cattle price cycle as bankers start shutting them down, but by then it is too late. It seems to me that in the cattle cycle price lows of the mid-1990s we are seeing the same script we saw with cattle cycle price lows of the 1980s—but with a new set of actors. We really never learned from the cattle price lows of the 1980s. What we did learn, we have already forgotten. Somehow, financial management must rise in importance in the minds of farmers and ranchers or we will face this same financial crisis again in the next beef price cycle.
Today's profit margins are just too small to try going it without financial management tools.
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Source: Harlan Hughes (701) 231-7380
Editor: Barry Brissman (701) 231-7866
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