Farm Business Management
The Distress Farm Situation
Speaker: Mike Roberts
Extension Agent Farm
Business Management
Virginia Cooperative
Extension, SE District
Courtland
757.653.2572
RISK – the Exposure to the
chance of injury or loss (American College Dictionary).
Types of Risk
1.
Financial
2.
Production
3.
Price
Farming is a business not
just a lifestyle. It is certainly possible to
“Farm to make a living.” It is not
always possible to “Live making a farm.”
There is a big difference.
Risk Management means treating the farm as business,
not just a way of life. It is a way of
enhancing the viability of the business by increasing the probability of
surviving and thriving in today’s changing and challenging environment.
In
light of adverse weather conditions and low prices, many producers will face
the possibility of financial setback in 1999.
The first thing that usually occurs in distress situations is declaring
the area a disaster. This translates
into a given amount the farmer may receive in the form of a loan. However, the loan is not the first step.
·
Develop a current Balance Sheet:
1.
If
possible, develop a 5 year Financial picture
2.
Determine
what assets may be sold such as:
a)
Timber
b)
Unused
or under utilized machinery.
·
Enterprise analysis:
1.
Document
& Rank crop production costs according to:
a)
Chemicals
b)
Fertilizer
c)
Lime
d)
Land
rent
e)
Lease
payments
f)
Repairs
g)
Labor
h)
Interest
2.
Analyze
gross and net income.
3.
Review
production yields and rank them as:
a)
Below
average
b)
Average
c)
Above
average
4.
Analyze
the marketing plan documenting:
a)
Price
received
b)
Marketing
strategy
·
Analyze family living expenses and needs (separating needs from wants).
·
Develop a plan for the business based on values.
1.
Ask
yourself, “Why you are doing what you are doing?”
2.
Ask
other principals in your business “Why are they involved in the business?”
3.
Develop
a statement of business purpose based upon your values and beliefs.
·
Develop
short, intermediate, and long-term goals filtered through the vision of the
business.
·
Develop
a plan to meet the goals by:
1.
Developing
a strategy to reduce costs.
2.
Developing
a strategy to improve yields.
3.
Developing
a strategy to improve marketing of commodities.
·
An
improved marketing plan and better yields allow the greatest immediate
opportunity for improving income.
·
Restructuring the debt – to be considered, but considered last.
1.
Uses
equity in land, home, facilities, etc.
2.
Spreads out-standing debt over time to improve cash flow.
3.
Risky - debt restructure is based
on future, unknown, earnings.
4.
Must be carefully evaluated.
5.
In
order to justify debt restructure, adjustments
are needed in:
·
Operating
costs
·
Income
·
Capital
investments.
·
Family
living.
6.
Future principal payments on restructure are not depreciable for income tax.
7.
After losses are used up, payments are made from future, taxable profits.
·
Emergency loan program funds offer opportunity
to:
1.
Meet
accounts payables.
2.
Evaluate
overall the financial situation.
3.
Relieve
immediate stress allowing time to make rational management decisions.
4.
Shift
sources of credit from one source to another to allow for business recovery.
5.
Finance
loans at lower interest rates.
·
Eligibility requirements – not eligible if you can obtain commercial credit.
1.
Contact
FSA office to see if you qualify.
·
Forms of Credit:
1.
Commercial
Credit – Traditional – Local lenders and banks.
2.
Credit
On-line! – Non-Traditional – Allows for analysis from many sources.
3.
Machinery
– Non-Traditional – Finance through dealers
4.
Tax filing extensions and breaks – Non-Traditional – Income averaging and
other tax management strategies.
There are many
sources for cash flow. The effort to
find them is well worth it! For
additional assistance and information on managing risk and farm business
management contact one of the Farm Business Management
personnel of Virginia Cooperative Service: