NEWS for North Dakotans
Agriculture Communication, North Dakota
State University
7 Morrill Hall, Fargo, ND 58105-5665
April 2, 1998
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
As North Dakota's diversified farmers put together their business plans for 1998, positive cash flows seem to be difficult to project. Yet, bankers are insisting that farmers and ranchers be able to project a positive cash flow before they issue an operating loan. If you can't project a positive cash flow, what is next?
In my previous two Market Advisors, I provided some simple guidelines and financial benchmarks that you can use to determine if your farm or ranch business is financially sound, is under some financial stress, or is under severe financial stress. If you would like copies of these two Market Advisors, visit www.ag.ndsu.nodak.edu/cow or call my secretary, Sandy, at (701) 231-8642, or e-mail her at agecon@ndsuext.nodak.edu .
If you find that your farm or ranch business was under moderate or severe financial stress, I suggested that you needed to first consider restructuring debt and, second, to consider selling off some assets. Roy Ferguson, a nationally known agricultural financial consultant, says he rarely finds a farm or ranch business that does not have 10 percent of its assests under-employed or not employed at all. The key here is to carefully analyze the assets in your business. This is absolutely critical before you can even consider what to grow in 1998.
Steve Enger, president of The Ferguson Group, Hatton, N.D. has proposed a two-tier debt restructuring plan that was developed by Roy Ferguson and used in the 1980s financial crisis. The two-tier program allows a lender to separate debt into two pieces, Tier I and Tier II. The second piece, or Tier II, that can not be adequately serviced, is charged 3 percent interest with no principal payment. As principal in the first tier is reduced, debt from the second tier is moved into the first tier. This two-tier system provides the farmer or rancher with a repayment method and provides the banker with a means of not classifying this loan as a "bad loan." If you think this two-tier system might have some application to your situation, call Steve Enger at (701) 543-4128.
In times like these, it is important that farmers and ranchers sort out what is a priority. What is it, exactly, that you want to do this next year? If you are a farmer or rancher struggling under financial pressures, profitability is not what is most critical. In times like these, cash flow becomes all-critical. You have to cash-flow each and every year or you will be answering to your banker. In times like these you have select a specific goal for your business and focus all of you management energies toward this one, specific goal.
As I see it, you have five goals to select from. First you could select "maximizing production" as your goal. Certainly, given North Dakota's experience with crop diseases the last five years, this goal has considerable appeal; however, as you push your yields towards the maximum, do not forget the economic principle that as you apply more and more inputs to each acre, diminishing returns sets in and per-bushel unit cost of production on that acre goes up. Increasing per-unit costs of production can eat you alive. North Dakota wheat farmers have demonstrated this fact: direct costs of production have gone up in 7 out of the last 8 years.
Second, you could select "maximizing dollar returns to unpaid labor and management" as your goal. This is a very conventional management goal used in normal times; but, times are not normal.
Third, you can select "maximizing your contribution to overhead" as your goal. This third goal makes particular sense in years that you may not be able to cover both direct and overhead costs. For some of you, this is one of those years. This third goal is a "loss minimization" strategy based around the economic principle that as long as you can cover all direct costs and some, even if not all, overhead costs, losses are minimized by farming. A computer program called FARMPLAN has been developed for analyzing this management strategy.
Fourth, you could set "maximizing net cash flow" as your management goal. Remember, if you are under financial stress, cash flow is all-critical.
Fifth, you could select the goal of "maximizing dollar returns to your limited operating capital." Farming with limited operating capital applies to farmers or ranchers that can not get all the operating capital they need. NDSU agricultural economists developed this strategy of "farming with limited capital" in the early 1980s.
I have taken NDSU's 1998 crop budgets for south central North Dakota and ranked 20 crops under the last four management goals outlined above. If your strategy is to maximize returns to unpaid labor and management in south central North Dakota, the primary crops to consider are confection sunflowers, crambe, buckwheat, and alfalfa. Spring wheat, soybeans and dry beans are on the second list. Corn grain, corn silage, and oat hay and alfalfa establishment are projected as the lowest returners.
If your strategy is to maximize net cash flow in south central North Dakota, corn grain, confection sunflowers and buckwheat stand out at the top. The second tier is spring wheat, soybeans, dry beans, oat-hay-alfalfa establishment and alfalfa. The lowest net cash flow generators were oats and corn silage.
If your strategy is to maximize contribution to overhead (a loss minimization strategy) in south central North Dakota, spring wheat, confection sunflowers, crambe, buckwheat and alfalfa stand out. The projected lowest contributors to overhead are corn grain, oats, rye, corn silage and oat-hay-alfalfa establishment.
Finally, if your strategy is to maximize returns to each dollar of operating capital—the farming-with-limited-operating-capital strategy—the projected best crops are crambe, millet, buckwheat, winter wheat and alfalfa. The projected poorest crops for this strategy are corn grain, oats, rye and oat-hay-alfalfa establishment.
Each management goal discussed above leads to a different ranking of your potential crops to grow. What you should grow in 1998 depends on your exact management goal. Your goal, as a manager, is to decide which one of these goals is best for the financial well-being of your business in 1998. What you select as your business goal this year will determine the framework for the course of action that you should take in 1998.
My selected crop rankings are not what's important, nor do I suggest that you use my crop rankings. What I have presented here is a process to help you determine "What To Grow In 1998?" I suggest that you apply this same process to alternative crop budgets tailored to your specific geographic region and farm or ranch.
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Source: Harlan Hughes (701) 231-7380
Editor: Barry Brissman (701) 231-7866
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