Increase Cash Flow by Communicating Plan with Lenders

Nov 21, 2017

By Steven Johnson

Managing a farm’s cash flow is critical. The ability to generate cash is what allows farmers to pay their bills.

Many Iowa farmers have done a good job of forward contracting 2017 new crop bushels and hedging or buying put options, putting them in a position to avoid cash flow concerns this fall and winter. There are other farms, however, holding large quantities of unpriced crops that could see cash flow challenges and may want to focus on understanding other marketing strategies and tools rather than storing bushels unpriced.

Suggestions for how to market these stored bushels is the focus of “Communication is key when cash flow is tight,” an article by Steve Johnson, farm management specialist with Iowa State University Extension and Outreach. The article can be found in the November issue of Ag Decision Maker.

Johnson has these recommendations for farmers trying to maximize their cash flow.

First, don’t wait too long to talk to your lender.

“If you know cash flow will be a problem, communicate that early to your lender,” Johnson said. “A large amount of cash debt has been recently restructured to stretch out principal payments and free up working capital. Lenders could be reluctant to restructure loans without a commitment from the borrower to improve their cash flow management to meet existing debt obligations.”

Additionally, most cash flow problems don’t appear until late December or January. Some lenders will require the use of the USDA Farm Service Agency’s guaranteed loan program before providing additional funds.

If storing grain on farm, Johnson recommends shopping around for the best cash price possible.

“Perhaps the greatest benefit of storing grain on farm, aside from harvest efficiency, is that it allows the farmer more time and improved chances to shop around for better cash prices reflected in basis,” Johnson said.

His final suggestion is to consider delivering additional bushels in December. By communicating with your grain merchandiser in advance a producer can still seek a greater future price through a basis or minimum price contract.

“With much of the actual cash price of the grain being received on delivery, needed cash flow can be generated while also eliminating storage costs, basis risk and accrued interest,” Johnson said.

Source: istate.edu

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