5 Financial Considerations Farmers Should Focus On Right Now
As we approach the end of 2022 and look ahead to the upcoming 2023 season, now is the time to keep a few key financial considerations in mind.
1. 2023 Crop Year Planning
It’s never too early to start reviewing projected cash flows for the next crop year and making financial plans around those expectations. Strategizing your plan for the next year will enable you to start working proactively on a number of other financial actions on this list and be more prepared as you work on each of those items.
Getting your plan together early will also help you plan your future input purchases, implement hedging strategies, and understand how much working capital you will need for the upcoming season.
2. Operating Loan Renewals & Interest Rates
Operating line renewals are just around the corner. In the current volatile environment, producers should be proactive in securing their lines of credit earlier. Input prices are still elevated and the need for a larger line of credit is very real this year, especially with the potential timing of purchases.
As producers renew and/or expand their operating lines, they should also keep a close eye on their interest rate and the structure of that rate. The Federal Reserve is anticipated to implement additional interest rate increases by the end of the year. This will have a direct impact on the borrowing rates of operating lines, so producers should consider getting rates locked in now.
When working on your line of credit for the upcoming year, having your crop plan already put together will facilitate that process to ensure you get the borrowing capacity and flexibility you need from the start.
3. Evaluating Working Capital Needs and Risk Management Plans
Reviewing your working capital position is a constant on an operation. Cash is always king.
As we approach year’s end, it is important to know your working capital needs for the remainder of the year and going into the spring. Understanding your working capital needs and position allows you to make better informed decisions regarding input purchases and commodity sales.
Working capital also plays a key role in the evaluation and implementation of a risk management plan for the coming year. Depending on the risk management strategy you use, it can cause a strain on working capital. By this time, you have likely done your crop plan for the next year and have a good understanding of what your input costs will be if you haven’t already locked them in. Now it is time to figure out how you will protect your investment.
Understanding your cost of production will allow you to start making decisions around implementing your risk management plan.
[WATCH: Working Capital and Farm Risk Management]
4. Locking in Input Supply
Last year, we saw major challenges with the supply chain and producers being able to get their hands on supply. Being proactive and locking in supply early this year will be very important.
This applies not only to locking in prices, but also to securing deliveries and taking possession of products while they are readily available. Suppliers are also looking to lock in their supply this year, so working with them early will help in securing both a competitive price and the ability to guarantee a supply.
5. Tax Planning
With commodity prices at their current levels this year, many producers will want to be more proactive in their year end tax planning. Does it make sense to prepay input, defer income, make improvements, or upgrade equipment, for example?
Because every operation is different, it’s important to work with your accountant to plan for your operation’s unique situation. It is never too early to start having these conversations with your accountant and planning ahead.
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