Farming is not for the faint of heart. Farmers can be meticulous in crafting their production and financial plans for the year only to have Mother Nature throw them a curveball. A rainy spring planting season or searing summer heat can waylay painstakingly laid plans.
“Farming can be very volatile,’’ said Paul Canaday, vice president at First National Bank & Trust Co “There are tremendous opportunities, but there are also tremendous risks.”
Managing those two extremes is the balance that a farmer and his banker strive for throughout the year’s farm financial planning.
Planning for an upcoming farming season usually begins about the time that a farmer is finishing up his harvest from the previous season. When the snow is on the ground, farmers are putting a sharp pencil to their plans for fuel, fertilizer, seed and machinery costs for the new season.
Canaday said farmers try to manage risk by locking input costs, calculating their needs for fuel, fertilizer and seed needs based upon their production and cash-flow plans.
Many farmers look to “pre-price” next year’s crop input costs during November and December, just as soon as last year’s fields have been picked clean.
“Farming is a very expensive business because of the high costs of inputs,’’ Canaday said.
Farmers try to lock in prices because it takes some risk out of the equation, Canaday said. Pre-pricing fuel, fertilizer and seed can keep a farmer from becoming a hostage to markets that are becoming increasingly fickle, he said.
Farmers may also lock in the commodity prices they will receive for their future crop, selling a percentage as a hedge against sudden downturns in the markets, Canaday said.
Canaday said purchasing crop insurance can also remove some of a farmer’s financial risk in the event of a hail storm or drought conditions. “Crop insurance provides a safety net so farmers aren’t at the mercy of the weather and markets.”
Talks about an agricultural operation’s borrowing needs go on throughout the year.
Discussions about annual operating loans go on from the late-fall through the spring as farmers and bankers work to put together a plan. Costs and revenues farmers can control ” contracted prices for fuel, fertilizer, seed ” they try to control.
An operating loan with a revolving line of credit, similar to a normal consumer’s monthly credit card bill, allows a farmer to craft marketing plans and pay month-to-month expenses.
“Farmers will pay their seasonal input costs, fuel, seed and rent (if they are renting farmland) just like consumers pay their credit card bills,’’ Canaday said.
Day-to-day expenses are taken care of with the operating loan and credit line, with farmers managing their long-term needs for machinery and farm ground with separate loans.
Canaday likened a farmer’s borrowing for machinery and land to a consumer taking out loans for a new vehicle or a home. Farmers have intermediate loans for farm machinery and long-term loans for land purchases.
“A combine can cost $250,000, a tractor $200,00,’’ Canaday said. These are not expenses that can be met by one year’s farm income, he said. Longer term loans are made throughout the year.
Operating loans are secured by anticipated crop revenue, intermediate loans are secured by machinery and the long-term loans are secured by the farmland, Canaday said.
All of this planning is intended as a buffer for the farmer from the vagaries of the weather and the markets.
Crop production risks can include a wet spring that delays planting, scorching summertime temperatures that can drive up irrigation expenses and a damp fall the prevents corn and soybeans from maturing naturally in the fields.
Farmers hope for timely rains during the growing season, but if conditions become parched they will fire up their irrigation systems. Meanwhile, they keep their eyes on the skies.
“Farmers are very conscious about the cost of irrigating,’’ Canaday said. “They’ll go out in the middle of the night to turn off their irrigation pumps if it starts raining.”
As the growing season nears an end in September, farmers want skies to clear so crops can mature and dry on the stalks. Farmers would like to harvest their corn when it’s about 15.5 percent moisture.
That moisture level allows farmers to avoid the added expense of drying their grain, Canaday said.
And when the crops are in the bins and the machinery is in the shed, the farmer and his bankers sit down and evaluate the operation’s bottom line. A balance sheet listing a farmer’s assets and liabilities gives the farm producer and banker a snapshot of the operation’s economic health.
“It gives us a picture of profitability and the net worth of an operation at the end of the year,’’ Canaday said. “We then compare one year to the next.”
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