Has your farm seen good years recently? Many farms are in
great financial shape right now, and that’s going to be really important,
especially if you’re looking ahead at what ag bankers and economists are
They’re predicting that rising costs and shrinking margins
are ahead for agriculture. Financial strength that you’ve built up in the good
times is going to make the difference in the years ahead. Healthy working
capital and equity can help open a lot of opportunities, even during a
As we move through the growing season and into harvest, the
markets continue to be top of mind for most farmers. And that’s understandable
because they constantly change. There always is something new affecting the
picture — demand, weather, outside markets, the global situation, the
But here’s something else to think about, something that
ties very closely to what’s going on in the markets and how you go about
creating a plan to reduce your risk and deal with tough times: How’s the overall
financial health of your operation? What are its vital statistics right
If you answered, ‘Great!’, then my question to you is: How
do you know? Do you meet regularly with your banker, not just once a year when
you’re asking for credit? Do you work with a financial adviser or consultant on
a regular basis?
It’s one thing to know what’s going on with your
current-year cash flow. That’s very important. But taking a step back and
looking at the overall picture revealed through the numbers will give you a
bigger view of what’s going on.
I often talk about the working capital and equity to asset
ratios we recommend for our clients. The goal is to have 40 percent of your
gross revenue available as working capital. Our benchmark for the farm’s equity
to asset ratio is 60 percent to 65 percent.
Our ag finance department has been tracking these two
ratios, among others. On average, farmers’ net worth in their operations has
grown by $1.1 million, just in the past two years.
Right now, the balance sheet looks pretty good for most
farms. Farm equity to asset ratios have risen on average from about 63.7 percent
in 2011 to 65 percent in 2013.
However, many of the assets that have contributed to this
increase aren’t liquid — think land, machinery, grain bins. That makes it more
likely that your net worth is growing, but your cash resources remain limited,
squeezing the operation during tighter times.
You can prepare now by knowing what the numbers are telling
you about your operation and acting accordingly. The farms that run their
business by the numbers will be the ones that will survive and thrive during
what could be a down cycle in ag.
Along with that, you need to be thinking about what the
growth of the farm will mean for your legacy. I recently heard about a farmer
who said he had never considered his farming operation large enough to ever be
exposed to estate tax.
But in recent years, his farm has grown. He’s invested in
land. He and his family have built side businesses. They’ve added grain bins and
tiled some ground. With rising land values and the growth of the operation, his
net worth has risen substantially.
He said he’s realized he can’t keep thinking that his
operation is “safe” from estate tax anymore, so he and his farming partners have
decided to take action. They’ll start working with one of our legacy advisers
soon to put a plan in place.
If you haven’t worried in the past about pushing through the
estate tax exemption level, you need to consider what it could mean to your
operation now. You’ve invested in your operation by buying land, machinery,
grain bins, irrigation and making other improvements. You’ve worked to improve
your business strategy and practices.
You might be closer to that exemption level than you think,
possibly leaving your operation exposed to estate taxes. And when that happens,
you’re hurting the future of the farm with the next generation.
They may not be able to pay those taxes without selling off
assets. Sadly, selling off assets can mean a large part of their livelihood is
A good legacy plan can help you be sure that doesn’t happen.
Having a gradual transition — of both the assets and the management
responsibilities in the operation — brings everything together and gives all the
generations who are involved peace of mind.
You’ve built a farm business that you’re proud to own. Now
it’s time to pay it forward with a plan to pass it — all of it — to the next