Agriculture has went through a transition in recent years and we are in an environment of higher cost of operating capital, higher variable costs, growing costs of fixed debt and volatile markets. The modern grain operation needs to be prudent of managing cash flow in the years ahead.
This problem is not unique to farming, but needs to be managed properly. The risk of insolvency can sometimes be greater than the risk of bankruptcy. One needs to be able to manage cash flow to ensure creditors are paid on time and possibly early, in terms of operating loans, to minimize interest costs.
Throughout the past decade, access to capital has been relatively affordable and available. Cost of borrowing plummeted during the pandemic to ensure continued business investment and help keep calm in the marketplace. It was not until partway through 2022 that many central banks began to raise interest rates to help battle the other problem we have found ourselves facing; inflation.
Prime rate at Canadian chartered banks fell to 2.45% during the pandemic and stayed around 3%, give or take, for the majority of the decade prior. Prime rate has jumped to 6.7% at most institutions following the last rate announcement from the Bank of Canada in January. Next announcement is set for March 8th, although it is still up in the air whether there will be a pause or another hike.
Using Marketing to Help Manage Cash Flow:
Many western Canadian producers got stuck in a tough situation in the fall of 2021. Many producers forward sold very heavily and dealt with large buyouts at elevators. In another situation, producers who had a reasonable amount forward sold did not have to deal with buyouts, but dealt with the guilt of seeing crop prices double when they were nearly already sold out of crop due to the smaller harvest. (Letting emotion take over and forgetting why the forward sales were made in the first place).
There are many tools a producer can use to mitigate the risk of this scenario happening again:
• Use of Act of God Contracts
• Using Put or Call Options depending upon your situation
• Forward Selling a Reasonable Amount
It all really comes down to your risk profile and how complex one wants to be with marketing. It can be as easy or as complex as one wants to make it.
“Marketing crop in fall of 2021 into 2022 was easy…just wait until tomorrow to sell”
This mindset led to complacency as producers tried to market themselves out of a bad crop. While many producers had great success with this, it may have led to issues with the following crop. Leading into 2022 crop and the winter of 2023, some producers began to market simply on the premise that prices rose last winter, so they should rise again this winter. Forgetting the fact that the winter prior we had major drought in some regions of South America, food hoarding, production issues in North America and a war breaking out between two massive agriculture exporters. The Black Swan events followed each other one after another.
Canola has trended lower throughout the year. Producers were able to forward sell some $22, $23, $24 canola in the spring of 2022 for fall delivery. Although it is fair to say producers were nervous about getting too heavy at this price due to production risk. Drought, late spring, fall frost, it is well understood why one wants to keep production risk minimized. Fair enough on the production risk argument: although we knew that some specialty canola contracts have Act of God options, put options, ect.
Once again in the fall, Canola was approaching $20.00 in some regions and, in hindsight, was some of the best opportunity so far.
Getting back to the main point of the article, were you planning your cash flow needs out ahead of time? Did you know what your total commitments were from October to February? Did you get caught needing that extra $100,000 or $200,000 come time to pay off input lines?
With $19.50 canola in the fall, using some “opportunity cost” calculations, one would need between $20.00 and $20.25 come time to pay off input lines in the spring depending on your cost of operating capital (remember cost of operating capital has risen substantially for many operations).
Cash Flow Tips Heading Into Fall of 2023
• Know what your cash flow requirements are. Find a template on excel or even write it out on a notepad at the bare minimum. When do you need cash and how much?
• Don’t wait until you need cash to start making cash. Market your grain when you can and not when you have to. Waiting and hoping prices rise when you need cash in a month works the odd time, but most times it is a losing proposition. Know your commitments a year to 6 months out and have a plan in place
• Know your Costs of Production. What is a good price? A Breakeven price? Can you afford to sell your canola for $14, $16, $18? What do these numbers mean to your operation?
• Use tools available to you. Cash advances available through the Advance Payments Program (CCGA, Farm Cash) are a great tool if used properly. Producers may be able to access up to $250,000 interest free operating capital and up to $1,000,000 of total advance cash at Prime minus 0.75% for the current program year.
Another tool is to work with your lenders for any additional operating capital. Operating capital costs differ between institutions and input dealers. Shop around for the best rate. A good relationship with your lender goes both ways.
Exceed Grain Marketing
We help producers market their grain not based off of pure speculation, leave that to Wall Street. We help producers better understand their whole marketing plan in general and bring an outsiders perspective to the operation. We use a program to input production costs, cash flow requirements, capital budgets, etc. Lets look at the true fundamental picture, market news, your current market position, ect. Are you oversold or undersold? What crops do you want to move or hold onto heading into summer?
We work with some very sophisticated producers who are great marketers themselves. We help producers who are too busy and may overlook the small details. Remember, even Connor McDavid has a skating coach. Lets work together.
I can be reached at 306 873 7768 or [email protected]
Another way to reach us to find the proper advisor for your region is to contact us on our website.
We have an excellent team spread across the Prairie Provinces and into Montana, North Dakota and Idaho.
Ty Kehrig
