Chris Barron: 2021 Cash Flow Considerations
December 7, 2020
A global pandemic, drought and a derecho that devastated thousands of crop acres and damaged massive amounts of farm infrastructure – 2020 provided no shortage of challenges. Additionally, extremely low commodity prices early in the season followed by a counter seasonal rally made marketing difficult and frustrating.
The late-season rally did however provide some opportunities to finish up 2020 sales, salvaging a better marketing opportunity than anyone could have predicted.
Government aid along with crop insurance indemnity payments also helped the bottom line and was just enough to keep most producers profitable.
Now that we have survived all of the challenges from 2020, what should we focus on for 2021? Here are four key questions to consider when putting together your 2021 budget.
1. Can we count on any government assistance in 2021? A budget without government assistance will be necessary for your financial planning. Counting on any government assistance could be a dangerous fallacy for your 2021 cash flow. Your cash flow should only include guaranteed government income such as CRP payments or other pre-existing conservation approved programs. Be extremely conservative as you initially build the income side of your cash flow.
2. Do I have accurate expenses calculated for 2021? Pay special attention to the accuracy of the “Big 3” items: land, equipment and returned to management/overhead expenditures. These three categories alone can easily consist of more than 50% of your total expenses. Focus first on the biggest line item expenses and work toward the smaller ones to dial in the accuracy of your expenses.
3. Where will commodity prices go from here? As always, commodity price opportunities will come and go throughout the year. Trust your cash flow estimates. Consider your cost of production based on your actual five-year production history. Establish a “margin target” instead of a “price target.” Put offers in well in advance to minimize missed opportunities. Chasing a “price objective” can be dangerous while managing a “margin target” limits poor emotional decision-making. Also, be open to using all of the marketing tools at your disposal, so long as you absolutely understand the positions you are taking.
4. Is my risk management plan adequate? To manage risk, maximize your insurance coverage. As a percent of total cost of production, crop insurance generally ranges between 3%-6%, while protecting as much as 75%-95% of your risk. There is no higher value input you can purchase, as it provides peace of mind and economic security. This coverage also allows you to aggressively market grain when your margin targets are realized.
Chris Barron is director of operations and president of Carson and Barron Farms in Rowley, Iowa. He is also a national financial consultant for Ag View Solutions.