NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665

December 23, 1998

NDSU Economist Suggests Producers Study Cash Flow to Aid Decisions

Farm and ranch enterprises ultimately must generate profits, but during difficult times a producer's focus needs to be on cash flow. Improvements in a farm or ranch's cash flow can come from increasing income, lowering variable costs, reducing overhead payments or some combination of the three, says an ag economist with the North Dakota State University Extension Service.

However, each strategy by itself is likely to produce only a small financial impact. "The key is to build as many of those small impacts as possible," says Dwight Aakre, extension farm management specialist at NDSU.

With respect to their options for increasing gross income, producers can grow different crops, add a livestock enterprise or do both—in short, they can diversify. They can look for ways to get better prices for what they now produce. Or, they can produce more—either by increasing their yields or by expanding the size of their operations, although this option usually requires capital expenditures that contribute to an increase in overhead payments.

"When it comes to analyzing variable costs, producers should be asking themselves, `Is there a way of doing what I'm doing that is cheaper?' Of course, producers need to have a record-keeping system that can help them answer that question," Aakre says.

Included in the category of overhead payments are principal and interest, real estate, self-employment and income taxes, farm utilities, hired labor, cash rent and family living expenses. Aakre points to overhead payments, yield variability and subsequent production shortfalls as being the key reasons why many producers are now experiencing cash flow problems.

"During the last several decades, we've switched from spending what we've earned to spending what we hope to earn," Aakre says.

To help analyze some of the short- and longer-term options available to North Dakota producers, Aakre and a group of NDSU ag economists developed FARMPLAN, a linear programming computer model. For their analyses, they created seven model farms representative in size and mix of enterprises in corresponding multicounty areas of the state. Each base farm had a beginning debt-to-asset ratio of 0.50.

Aakre and the others used a set of yields based on multicounty averages. They based operating expenses for each farm on averages derived from the records of local producers enrolled in the North Dakota Farm Business Management program. Crop prices in the model reflect the long-run projections (1999 through 2002) from the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri—Columbia. For example, wheat was priced at $3.60 a bushel, malting barley at $2.05, soybeans at $5.25, oil sunflower at $10.50 a hundredweight, and canola at $11 a hundredweight.

The computer analyses offer a number of points for producers to consider. For example, large farms (6,000 acres) are more profitable in the western part of the state.

Aakre says, "Land costs become a hurdle to expansion in the east."

But even in the west, the increased debt load that expansion requires provides only slightly more returns than what a 10-percent yield increase could generate on the model's smaller base farms in that area.

"Productivity is still important," Aakre cautions, "but we need to scrutinize the costs of obtaining higher yields."

Switching to organic production is another option. In some areas of the state, farming organically produced the largest cash surplus of all the options. However, that surplus came only after the farm was certified organic, a period that takes at least three years, says Andy Swenson, extension farm and family resource management specialist at NDSU. In addition, transportation and dockage costs are higher under organic production, and marketing is more complex and risky.

In some areas of the state, the model showed that adding a cow-calf enterprise could produce a larger cash surplus than merely diversifying the crop mix. However, until the cow herd is paid for, the debt service often consumes most of the additional gross income, Aakre says. The greatest potential for adding a livestock enterprise exists where unsaleable crop residue can be "marketed" through the beef herd.

Also, the model showed that share-rent arrangements where the operator receives less than 75 percent of the crop generally result in less favorable cash flow than cash rent, Aakre says.

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Source: Dwight Aakre (701) 231-7378

Editor: Dean Hulse (701) 231-6136