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Financial Solutions Available to Help Farmers Increase Profit Margins

February 15, 2016

Farmers have been bombarded with bad news. Corn and bean prices are down and current projections show the cost of growing those crops during the 2016 season to be more than their sale price.

With margins tight, having a full understanding of the financial side of farming is crucial for any producer.

Fortunately for farmers who want to get a stronger grasp on their finances and budget, Iowa State University Extension and Outreach offers a variety of resources designed to help producers plan and keep their heads above water until prices increase.

“Crop prices today are half of what they were three years ago, yet costs are nearly the same,” said Chad Hart, associate professor in economics and extension crop markets specialist at Iowa State University. “Profit margins have been squeezed or made negative. The challenge of having a successful farm business has been made tougher.”

With margins low and not expected to rise for a couple years, managing those margins becomes a critically important component on any farm. Hart, along with Alejandro Plastina, an assistant professor in economics and extension economist at Iowa State, have a series of strategies intended to help producers manage their operation until prices rise again.

Hart and Plastina shared those strategies with farmers across the state of Iowa during ISU Extension and Outreach’s Crop Advantage Series, and the full presentation can be seen online through the ISU Extension and Outreach Store. The most important thing for farmers to know, according to Hart, is what it costs to produce their crop.

“Know your break-even price,” Hart said. “How do you know a good price when you see it? If you don’t know your cost, you don’t know what a good price is because you can’t tell me if you’re winning or losing. When we had $7 corn we had people still losing money, and there are people now that we are at $3.50 corn that are still making money. Those that are making money today, they know their cost.”

The strategies offer solutions to help farmers meet their bottom lines, even during periods of low crop prices.

Protecting working capital and avoiding cash shortages are very important until markets rise again. This includes being cautious with any new capital expenditures. Farmers must also be careful not to lose any non-farm income while adding new revenue sources if possible.

A long look must also be taken at production costs, with farmers thinking about making changes that generate savings to offset reductions in revenue. Volume discounts for seeds or chemicals can help lower production costs if they are available.

Seeking out experts in different ag-related fields can also help farmers squeeze additional money out of each acre.

“Communication is key,” Hart said. “As farmers are looking at their cost structure they need to be talking to their field agronomist, their lender, tax advisor and crop insurance agent. We know and have the tools we need to use to improve margins.”

ISU Extension and Outreach offers several opportunities to help growers make sound financial decisions.

The Farm Financial Planning program provides one-on-one financial advice to farmers and their families. Financial counselors in the program utilize FINPACK software which runs a computerized analysis of the individual’s farm business. The consultation helps farmers answer three basic questions of sound business management: Where am I today? Where do I want to be in the future? How do I get there? The service is free of charge and an appointment can be scheduled by contacting an ISU Extension and Outreach Farm Financial Associate.

Additional financial resources are available through ISU Extension and Outreach programs like Farm Financial Planning and Ag Decision Maker.

A series of short videos titled ‘Crop Marketing 101’ have been posted to the ISU Extension and Outreach store. The instructional videos feature Hart and Steve Johnson, farm management specialist with ISU Extension and Outreach, and focus on understanding the crop markets.

Source: Chad Hart and Alejandro Plastina, Iowa State University