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Needs or Wants?

In a tough economy, be wise about your investments

Landscapes Summer 2010
MONEY MATTERS

Finger operating a computer keyboard

If you’re like most farmers and ranchers, you’ve been avoiding major purchases since profitability took a dive over the last year or two. Still, it may be a good time to consider a few small, or wise, investments. Some may cost you more time than money.

“Ag producers analyze their purchasing decisions more carefully these days,” says Johnny Schmucker, vice president and branch manager at Great Plains Ag Credit in Dumas, Texas. “You need liquidity and repayment capacity to take on any major investment.”

But you can dream, can’t you?

We asked Schmucker and these other experts to contribute their ideas on investments that might pay off down the road:

Land Is Still a Great Investment

Jones: In cotton country, renters usually pay landlords a quarter of the crop’s value. That can come close to a loan payment. If the price is right and you can afford the down payment, land remains a wise investment.

Oliver: Farmers here are hunkering down and avoiding debt. But historically, land has always been a good investment.

Sowell: Many of our customers own timberland and continue to invest in timber, although demand is slightly weaker. Fairly good interest exists even where facilities have closed down. Some customers are actively purchasing small timber tracts and recreational property, if it is something they have wanted all their lives. 

Used Equipment Can Save Dollars

Oliver: You can find decent used deals when times are tough. Most producers try to be loyal to local dealers, but some don’t mind traveling 500 miles to get a better deal.

O’Brien: If you’re just getting by, repairing or buying used is your best bet. A lot of producers do online research to negotiate with local dealers. If you buy on the other side of the state, you don’t get the same level of repair service from local dealers.

Jones: You can save by repairing or buying used, but you have to weigh the savings against time lost in the field if you break down. Repair costs have gone up, and today’s tractors are difficult to repair yourself. If we get a good crop this year, there might be a pent-up need for new equipment.

New Technology Becoming a Must

Oliver: Many customers have purchased satellite guidance systems to increase yield and reduce input costs.

Jones: GPS is a good investment, whether it’s on new equipment or you purchase add-ons. We see farmers moving their GPS from one piece of equipment to another.

O’Brien: About three-fourths of our producers use GPS. Most do conservation tillage, and you can’t do that without guidance systems. Cotton requires a lot of spraying, and guidance systems help you save costs and get more done in one day.

Sowell: A lot of poultry houses now use computer systems to control temperatures. You can improve air quality and use feed more efficiently.

Hold on to Your Livestock

O’Brien: Weather is the biggest downfall in the cattle industry. In a drought, producers sell cattle at fire-sale prices. Once you sell, it’s difficult to get back in — by then, cattle prices are up. We now offer weather derivative policies based on what time of year you need rain and how much. It can help you stay in business.

Oliver: We see more vertical integration among cattle producers. More are keeping calves longer, until they’re ready to ship to feedlots. You invest more time and pasture, but it can pay off.

Storage Gives You More Options

Oliver: In Louisiana, decreased cotton and increased corn acreage have led to major investment in grain storage. With your own storage, you can continue harvesting if trucks aren’t available at peak times to haul grain. And you don’t have to sell your crop right away — you usually get a price increase by waiting.

Bevers: Other grain states built on-farm storage earlier than we did. It allows growers to market year-round. Also, you need storage to preserve identity, and you could earn more from higher-protein grain.

Invest in Workers

Schmucker: Train employees and give them responsibilities. Good employees free you up to make well-informed business decisions.

Computerize Your Records

“The cost of investing in computer equipment and financial software — and using them — will be insignificant in the farmer's budget, and will pay annual dividends.” – John O'Brien

Jones: Quite a few of our customers access their records through our association’s online system. Customers are more astute about using spreadsheets and financial ratios. They view bankers as financial consultants and ask our opinion about what’s the best investment.

O’Brien: Using computerized spreadsheets to analyze cash flow and keep in–house financials updated can save time and money for producers not currently using them. The cost of investing in computer equipment and financial software — and using them — will be insignificant in the farmer’s budget, and will pay annual dividends. 

Sowell: Farmers used to wait until the tax deadline to get us financial information. Now they show us trends year-round and compare them to past years. That’s a big plus.

Bevers: You need good data to analyze your financial situation. Keeping good records is worth your time.

Marketing Pays Off

O’Brien: If you use forward contracts or futures markets, you won’t hit high market prices, but you won’t hit the lows, either.

Bevers: We can all produce a product, but good marketers look at pricing opportunities year-round. You can learn how in Extension’s short course, the Master Marketer Program.

These are just a few investments that can save you time and money. “Before you buy,” Schmucker says, “ask yourself two questions: Will this investment provide a return? And is it a need or a want?”

Also, before you borrow for your investment, determine your liquidity level. Bankers use several ratios to decide whether to lend to you, and liquidity ranks high on their list. Other financial standards to consider include repayment ability, debt-to-equity ratio and return on equity.

Your Farm Credit association can review many financial areas within your operation and help you figure out where you stand. “This benchmarking information can be used to determine if new investments make sense,” says O’Brien.

– Nancy Jorgensen


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