Cash Flow Management Strategies
By Steve Johnson
Iowa State University Extension and Outreach Farm Management Specialist
Cash flow concerns continue to be one of the key issues for most growers across the Midwest. Generating adequate crop revenue seems to be an emerging problem for 2018 despite large yields being realized at harvest. Key issues on the farm include:
- The cost-price squeeze is on many farmers with tight crop profit margins and cash flow constraints ahead. As such, pre-harvest marketing a portion of your 2018 crops late last winter and spring likely provided a temporary reprieve this fall and winter.
- Record U.S. corn and soybean yields are forecast, as well as total soybean production. The 2018 corn production forecast, if realized, will be the second largest in history.
- Many of these extra bushels are still unpriced in storage without a crop marketing plan.
- According to the USDA World Agricultural Supply and Demand Estimates (WASDE) projections for the 2018–2019 marketing year, total corn use will be more than 15 billion bushels, a record.
- Exports will remain large at 2.4 billion bushels, but perhaps not realized until the second half of the marketing year.
- Total soybean use is projected to be 4.268 billion bushels for the 2018–2019 marketing year—nearly identical to that realized in 2017–2018.
- Soybean exports would decline by about three percent for the 2018–2019 marketing year to 2.06 billion bushels.
- Expect corn futures prices to rally post-harvest as U.S. and global ending stocks decline to their lowest level in three years.
- With record 2018 U.S. soybean production, ending stocks are forecast to a burdensome 885 million bushels by late August 2019.
Trade and Tariff Concerns
The evolving developments with trade and ongoing retaliation of Chinese tariffs could influence this outlook, especially for soybean prices. The relationship between U.S., its competitor export prices, and South American weather merit a close watch. The ability for the rest of the world to make up for typical Chinese imports of U.S. soybeans in the first half of the 2018–2019 marketing year will be key. This is when U.S. soybean exports to China are typically at their highest levels. Expect some U.S. soybeans to be purchased by other countries and then shipped to China to avoid the 25 percent tariff charges.
The USDA announced a relief package for producers. The new Market Facilitation Program (MFP) was authorized under the Commodity Credit Corporation (CCC) and administered by the USDA Farm Service Agency (FSA). This program will provide an initial payment this fall, mostly for soybeans with a payment rate of $1.65 per bushel. As soon as harvest wraps up and you have Actual Production for your crops, consider completing the new FSA form CCC-910 so the first half payment (50 percent of production) can be made promptly. A second half payment is possible, but that decision will be made by the USDA after December 3. If it’s determined that the trade disputes are still damaging U.S. commodity markets, the USDA will compute MFP payment rates, based on the damage estimates at that time. This payment rate would apply to the remaining 50 percent of production not covered by the initial payment.
Cash Flow Strategies
One of the keys to surviving and possibly thriving during this tight ag economy is good cash flow management. Start to overcome cash flow challenges by identifying how much and when bills and loan payments need to be made. For other unpaid bills, perhaps a partial payment can be made without triggering additional penalties and interest charges. Perhaps your farm has an operating line of credit with room to advance additional funds until crop sales are made.
If you know cash flow is already going to be a problem, communicate early with your creditors. Many primary ag lenders spent the past few winters restructuring existing farm loans to stretch out principal payments and free up depleted working capital. These lenders might be reluctant to restructure loans anytime soon without a commitment from the borrower to improve their cash flow management to meet existing debt obligations. Farms without access to typical operating loans should use caution before advancing family living and farm-related expenses on credit cards or debt instruments that charge high interest rates.
Focus early on understanding other crop marketing strategies and tools rather than just storing bushels unpriced. With more farms facing cash flow constraints this fall, consider the delivery of bushels. Communicate with your grain merchandiser regarding how various marketing tools could be used to shore up your cash flow needs and avoid additional storage charges.
You can still benefit by being “long deferred futures” using a basis contract through your merchandiser and/or “purchase call options” called a minimum price contract. Consider delivering bushels to a processor where better cash prices exist reflecting basis. This will be especially true as harvest wraps up and basis typically narrows.
For bushels you plan to store, the USDA FSA offers a low-interest, nine-month non-recourse marketing loan on harvested grain. On-farm stored bushels will need to be measured and commercially-stored grain be placed under a warehouse receipt. This marketing loan amount is limited to your county loan rate, which, for many counties, is typically below the national loan rates of $1.95 per bushel for corn and $5 per bushel for soybeans, respectively. Thus, the marketing loan program is not a marketing strategy for cash grain, just access to cheaper interest rates for up to nine months.
It could be well into the late winter or spring months for corn and soybean futures prices to rebound and basis improves, especially for soybeans. Overcoming the fixed costs of commercial drying, shrink and storage costs might prove challenging. Storage space could be tight as harvest wraps up. Consider what commercial storage costs and interest charges you will be accruing. Will the final actual cash price you receive be greater than your net return to grain ownership?