After struggling through the 2023 season, the agriculture community is looking to wrap up remaining harvest activities and reset for 2024. Finishing out the year means reflecting on input needs and maximizing future sales. Input prices are more favorable compared to last year’s historical highs. But commodity prices have also fallen, making future farm profits challenging to secure. Leaving many producers to wonder about their farm’s ability to handle a shift to potentially lower profits.
The MSU Extension Farm Business Management team offers some considerations and resources to help in planning your 2024 production season.
Financial Risk and Farm Profitability
Handling low profits means you need to manage the financial risks affecting your operation. These types of risks focus beyond production or marketing risks, such as poor weather or low market prices. Financial risks can be increased input costs, high levels of loan debt, low working capital and/or poor or incomplete budgeting for yearly needs. When these risks are present, there is often insufficient cash to pay bills, lower than anticipated profits and potential loss of owner equity. Farms that manage these risks are considered highly resilient.
When thinking about your farm’s profitability, consider whether your operation is financially resilient. How well can your farm absorb or withstand unexpected changes and potential financial risks? Do you have the ability to recover from these types of risks or adapt to change? How can you build and utilize your farm’s resilience when low profits are expected?
Building financial resilience starts with understanding your farm’s capacities and liabilities. This includes your level of working capital, existing debt, and operating efficiencies. Knowing what your capabilities are helps determine what options or opportunities are available to you. Equipped with this knowledge, you can make decisions that yield the best outcome for your business.
You Can Conduct Your Own Financial Analysis
Start by analyzing your previous production year. Adjusting cash transactions by accounting for pre-paid purchases, crop or livestock inventory changes from the beginning and end of the year, depreciation, loan balances and any unpaid bills reveals your actual revenues and costs. This analysis outlines your farm’s financial situation and capacities right now. It provides you with a picture of your actual profitability for the past year. For more information on financial analysis, visit the Farm Business Financial Analysis section of our website.
Project Your Cost of Production
This financial analysis also enables you to then look deeper at each individual commodity and what it actually costs you to raise them. Knowing last year’s cost of production can help you more accurately project this year’s cost of production. What costs will be the same or have changed because of input prices or changes on the farm? You should also consider any changes to production practices and their impacts on your overall costs. There are several tools available to assist producers in identifying their cost of production on the MSU Farm Management website Farm Business Cost of Production section.
Source:msu.edu
Photo Credit:gettyimages-d-keine
Categories: Michigan, Business