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Positioning Your Operation: A Framework for the Future

Date: 
Author: 
Cathy Olson
Educational Opportunities: 
Articles
Interests: 
Grain, Dairy, Swine, Beef, Young, Beginning Farmers
Home > Education & Events > May 2017 > Positioning Your Operation: A Framework for the Future
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For several years now, we’ve been experiencing compressed margins, low prices, and challenging economic times in the agriculture community. The February 2017 USDA Agricultural Projections to 2026 predict that grain prices will only have marginal increases over the long term, which may not begin until 2020.
With these ongoing economic challenges, tough decisions are being made every day in virtually every operation. Some producers have been questioning their level of interest in continuing. This is especially true for grain producers who may have considered exiting within the past ten years but, because of favorable economics, continued actively farming. Whether you’re in your first few years of farming, or in the sunset of your career, we’ve come up with a framework for things to consider when evaluating your operation's future.

Long Range Vision: Understanding long range goals help provide clarity to short term decisions. Some common goals include:
  • Bringing in a successor generation,
  • Growing the business,
  • Holding land together for the benefit of future generations,
  • Eventually exiting the business with financial security, or
  • Simply maintaining the size and improving efficiencies.
Regardless of the goals, there are many things to consider in reaching them. Begin preparing a roadmap of how to accomplish your long range goals. The roadmap should include trigger points such as “retirement” or growth and economic targets.

Consider Alternatives: Challenging economic times cause business owners to think differently. Tackling tough decisions may include considering some alternatives that do not seem to align with the long range plan. Preserving equity may involve a decision to exit the business. Burning through equity and working capital may reduce the amount of funds available when no longer actively farming. In some situations, continuing the operation may result in reducing the size of the business. Even though the long range goal is growth, there are times when reducing the size of the business in order manage through challenging economic times can position the producer for growth when new opportunities do arise.
It may be worth considering collaborating with other producers to gain efficiencies. Combining equipment lines and sharing labor can create management and economic efficiencies for both producers. In some situations, when a producer is nearing the end of their career and does not have a successor, collaborating with a nonfamily successor is an alternative to consider.

Rethink Debt Structure: Rapid repayment of debt is admirable and it feels good to the producer to have loans paid off. However, during challenging economic times, the accelerated payment plan may not cash flow for the business. Talk to your loan officer to explore alternatives for debt structure to help you achieve your long range goals.

Additionally, when a producer is considering an exit plan, debt should be looked at closely to be sure the cash sources can cover the loan payments, income taxes and provide funds for their desired lifestyle. Business debt may be managed by liquidating assets. However, consult with a tax advisor for potential taxes associated with the sale of assets. Real estate debt that continues into retirement should be reviewed. Will that real estate generate enough cash to cover debt, real estate taxes, and provide some cash for personal use?

Taxes: Producers have reinvested profits in the business which, in many situations, has resulted in deferred income taxes associated with carry over inventory, prepaid expenses, account receivables as well as depreciated equipment. Any producer considering an exit plan or business reduction plan, should consult with their tax advisor to design strategies that can help manage the potential impact of income taxes that may occur from downsizing and exiting.
If the long range plan includes transitioning ownership to a successor generation, the transition planning should include a strategy to avoid potential unintended negative tax consequences. It is common for the senior generation to map out a plan to sell assets without considering the immediate tax impact associated with various sale alternatives.

Understand Economics: Business and personal cash flows should be prepared every year and during challenging economic times it becomes even more important. Understanding the operation’s breakeven price can help with marketing decisions. Everyone has their own marketing philosophy. The ultimate goal is to generate profits. Unless the breakeven cost is understood, it is challenging to define profitable pricing targets. The business must be able to generate enough revenue to support the people involved. If personal draws are not supported by the business, it may require someone to work off farm to bring in cash, or it might be necessary to reduce personal draws from the business.
To generate additional cash, producers can review their assets and begin selling off those that are non-essential and non-income generating. Review the line of equipment or other assets and identify those assets that can be liquidated and converted to cash. For example, if a producer chooses to let rented acres go, or perhaps, rent out owned acres, the existing line of equipment may be too robust, making selling equipment a viable option to generate cash to reduce debt.

Get Started: The first place to start tackling those tough decisions is to identify long range goals. Take some time to look out into the future and consider where you want to be financially and what you would like the business to look like. This step helps you focus beyond todays challenging economics. Talk to advisors to design a plan that will increase your chances of getting positioned to survive these challenging years as well as getting positioned to take advantage of future opportunities. Take a disciplined approach to tackling tough decisions. Develop a comprehensive marketing plan that can take the emotion out of the decisions. Take a realistic look at the cost of living needs. During plentiful times the extras become essentials. During lean times, the essentials need to be re-evaluated.


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