When it comes to finances, most farmers’ fundamental concern is whether or not they can make a living farming.
“As farm financial specialists, we often speak about cost of production, return on assets, return on equity and maximizing our returns,” says Rick Dehod, agricultural farm finance specialist, Alberta Agriculture and Forestry. “As an agricultural lender, I often assessed loan requests on three premises. Firstly, does the farm create enough gross income to pay its operating costs as they come due? Secondly, does the farm make all of its debt payments on their due dates? Lastly, does the farm provide the farm family with a reasonable standard of living?”
Today, farm families enjoy the same standard of living as their urban counterparts. The most recent Statistics Canada data shows that the difference between household expenditures of an urban and rural household is relatively small, with the major difference being the cost of shelter. In 2015, total expenditures for an average Alberta household was $110,024, while total current consumption was $76,535.
“These household expenditures may seem high for the average farm family but often some expenditures, such as shelter, household operation and transportation, blur between farm expenses and personal expenses,” says Dehod. “In the end, there is only one pot of money that both expenses can come out of.”
In 2011, the average Alberta gross farm income was $264,518, and the farm operating expenses totaled $224,607 for a net farm income of $39,911. “Along with fertilizer and chemicals, family household expenditures are often one of the top three expenses that a farm has. In Alberta, a 2017 study saw that 79 per cent of household income was contributed to by an off-farm job. This shows a high reliance of farm families on off-farm income to provide a higher standard of living, manage volatility in farm income and provide funds for investment back into the farm.”
Although it is one of the top expenses a farm family has, Dehod says farm families often do not know what their total personal expenses are.
“Household demographics, the stage of the family’s life cycle, and family’s living expectations all contributed to different consumption demands. Keeping good records of your personal expenses is just as important as keeping good records for your farm business. We often talk about efficiency and scale, but needs and wants can affect the long-term viability and success of the farm. Knowing how your personal expenses fit into your farm’s strategic plan and your family’s goals and aspirations will help you in managing your finances and the ultimate success of your farm operation.”
2011 Census data indicates 98 per cent of Alberta farms are operated by farm families. “The ability of the farm to provide the farm family with a reasonable standard of living remains crucial to Alberta’s rural fabric,” says Dehod.
“It’s important to know what your income needs are, knowing what your personal needs are and how you will generate the income to fill those needs. This knowledge will also manage your wants. We often find that the wants get farm families into trouble. A family farm creates self-employment so managing the income to meet the needs of the farm and the needs of the family is hard to separate but always important to consider and a challenge to manage.”
For more information, see Off Farm Income in Alberta or Statistics Canada’s survey of household spending.
Managing cash flow stress
“With the 2016 harvest extended into the spring of 2017, some producers are having problems with cash flow and with meeting their farm’s ability to meet all of its commitments as they come due,” says Rick Dehod, agricultural farm finance specialist (AF). “A large portion of the snowed-under crop is either in the process of being harvest or has been harvested. Alternatively, some acres have been dealt with under the Agriculture Financial Services Corporation (AFSC)’s unharvested acres’ process.
“Once the 2017 crop is in the ground, producer’s attention will switch to valuing these spring-threshed crops and determining how best to market them to provide the much needed cash flow to get the farm to the 2017 harvest.”
Dehod says there are several things that can be done to deal with a tight cash flow.
“The first is step to do an assessment of the cash flow shortage, and determine if it’s a short or long term one. What may be the solutions to address this? What funds will be coming from crop insurance? Crop value and sales? Availability of the spring cash advance program? Other resources?
The second step is to determine the farm business’s equity position and its ability to survive the cash shortfall. “Having an update net worth statement will provide you this information,” explains Dehod. “Higher equity provides your business with the ability to withstand a longer term serious cash flow shortage because this you are able to borrow against your equity. Businesses with lower equity options could be limited.”
The third step is to decide whether the farm has to improve its cash flow and working capital position for both the short and long terms.
“Most producers have had on-going dialogue with their bankers and creditors regarding their farm’s ability to meet all its commitments. Communication is utterly important. Your account manager may be able to give you feedback on your ideas and possibly some strategies to improve cash flow and working capital. Looking at all options will focus you on all alternatives and possible solutions.”
If it is a short-term problem, Dehod says producers can look at their AgriInvest accounts. “AgriInvest is one of the business risk management programs under Growing Forward 2 (GF2), and it helps producers manage small income declines, and provides support for investments to mitigate risk.
“If you’ve identified a long-term problem, it may be that an interest only payment can be negotiated and the principal portion of the payment postponed for one year. If long-term problems are identified, then the primary cause of the cash flow problem must be found by examining the efficiency, the scale and the debt structure of the farm business. Efficiency is measured by the physical and economic output of the business. Scale refers to the size of the business. Is the farm large enough to recover and improve its working capital position? Debt structure describes the factors that determine the size of your principal and interest payments. These factors are interest rate, size of debt, the length of the term and the proportion of short-term and long-term debt.”
Examining the three areas of efficiency, scale and debt structure are important in dealing with cash flow stress, says Dehod. “Devote time to examining and preparing financial statements such as a net worth statement and cash flows. If it’s not your strength, get help from your account manager. Remember communication is important. Working with your lenders, and keeping them in the loop will help alleviate the business’s financial stress by finding good solutions.”