A Farmer's Guide to 2018 Financial Planning



From tax reform to rising interest rates, 2018 has a number of financial factors to consider. Here's what they mean for your operation.

Financial planning is more than just updating your farm's balance sheet; it requires an understanding of what is influencing the economy and how that will impact the year ahead. With rising interest rates, tax reform and tight margins, farmers have quite a few factors to consider in 2018. But what do these considerations mean for farmers and their operations?

1. The ag economy is projected to remain flat. Most projections show that the ag economy will stabilize. While small pockets of sporadic growth may be seen on a regional basis, overall, commodity markets were sitting on a large inventory leading into last year and strong yields in 2017 mean even more inventory in an already crowded market. Therefore, it is unlikely prices will increase significantly in the short term. In addition to a large supply of both corn and soybeans, the overall U.S. economy continues to strengthen, which has resulted in a rising interest rate environment.

What this means for farmers: Operations should continue to find ways to become more efficient and look for opportunities to add income if possible. It is also important that producers market their product effectively by having a sound risk management plan and sticking to it.

2. Margins will remain tight. Due to commodity markets remaining largely unchanged, most operations will continue to cope with leaner margins and tighter liquidity.

What this means for farmers: There are a number of ways to develop an operational strategy that will provide some padding for shrinking margins.

“We encourage producers to look for ways to improve the longevity of their operation.”

3. Long-term rates are rising as well, though not as quickly, and remain relatively low. What this means for farmers: If your operation has real estate loans on variable or adjustable products, now is the time to convert or refinance those into long-term fixed rates. With a relatively flat yield curve, producers have an opportunity to pay a minimal premium to lock in long-term rates. We encourage producers to work with their lender to determine what the best loan product mix for their operation is and take advantage of this window of opportunity.

  • Take time to examine your breakevens on a per-unit basis. As prices stay relatively flat or possibly decline, knowing your breakevens will ensure you can market your product with confidence.
  • Examine your operation's asset utilization. Capital assets that are not being maximized hurt efficiency because those dollars could be utilized elsewhere, such as reducing debt or investing in an asset with a higher rate of return.
  • Work with your lender to ensure your operation's debt is structured appropriately for today's margins. A balance sheet structure that worked when margins were wider may not work today.
  • A down ag economy is a crucial time to closely analyze production costs. Producers should pay close attention to both their variable and fixed cost structures to determine where their strengths and weaknesses lie. Every operation is different, but we generally recommend that variable costs (fertilizer, chemicals, seed, etc.) make up 45 to 55 percent of your gross income, while fixed costs (land payments, equipment payments, cash rent, etc.) make up 30 to 40 percent.
  • Interest rates are projected to rise. The U.S. economy continues its recovery after bottoming out in 2009. Economists expect this trend will continue, which is why short-term interest rates are projected to rise three times - or by .75 percent - in 2018.
4. Tax reform changed depreciation rules. Farmers will begin to see benefits from the tax reform bill passed in 2017 as early as this year. While the bill has some estate tax implications for families going through a farm transition, the majority of farmers will be impacted by lower tax rates and the updated rules for depreciation. Beginning in 2018, farmers can now write-off 100 percent of equipment purchases in the first year. Purchases made after September 27, 2017, are eligible for the 100 percent bonus depreciation as well.

What this means for farmers: The updated rules for depreciation mean farmers have greater flexibility from a tax management standpoint. However, producers making major equipment purchases in 2018 should work with both their lender and tax consultant to make the best decisions possible for their operation. Overall, it is key that tax management strategies align with the long-term goals and profitability expectations of an operation.

5. Opportunities still exist. Tight balance sheets and a down ag economy may mean doing things a different way. Downturns are an important time to look at opportunities to improve a farm's efficiency and/or diversify your income. It also provides growth opportunities for those who are well positioned to take advantage of them.

What this means for farmers: Adding income and diversity during tight times can help mitigate the impact of a down economy. Some families may wish to explore off-farm income options to help offset tight margins. Others may look at diversifying their production mix, such as raising crops for which they can get a premium or looking at becoming a contract grower for a livestock integrator. Regardless of your individual situation, we encourage producers to be progressive and look for ways to improve the longevity of their operation.

Though the financial landscape for 2018 is complex and current margins are tight, producers should feel optimistic about the long-term prospects for the agricultural economy. By carefully analyzing and understanding your financial picture, you will have a much better chance not only weathering a down cycle, but thriving in the long term. As mentioned above, every operation is unique, and we encourage folks to work with their lender and financial advisors regarding their individual situation.

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