Fact Sheets And Publications
Farm Management Strategies During Rising Inflation
April 2024 |听Written by Nate Bruce, Farm Business Management Specialist
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Farming during 2022 has been extremely stressful for听agricultural producers with so many things changing听about the economy, commodity markets, global听events, and production costs soaring. It is essential for听producers to think about strategies to manage their听operation鈥檚 financial aspects during times of inflation.听There is nothing producers can do to control input听prices or the price they receive for their outputs. The听only aspects of farming that producers do have听control over are management decisions about how to听manage cash, what to purchase and when, and听determining the cost of money that is borrowed. This听information sheet will discuss three different听strategies producers can use during times of听inflationary pressures.
Operate Efficiently
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Efficiently operating is the main key during times of听rising production costs. This is particularly true听regarding fertilizer. Fertilizer prices soared this year听over the price paid for last year鈥檚 crops. Producers听have been economical in the amount of fertilizer they听use this season. Some producers decided to bank on听鈥渆xcess鈥 fertility they have. Others have decided to听abandon rotations and plant more soybeans to avert听higher nitrogen costs. Poultry litter was used听tremendously by producers this year, despite at times听being scarce to find. Knowing the return value of听each fertilizer unit applied is essential for farming听during times of inflation. Machinery efficiency is听essential during times of inflation as well, particularly听when fuel costs have soared. Machinery expenses are听some of the most substantial expenses for a farm and听having sufficiently operating machinery is key.听
Evaluate your mechanical needs. Not only does the听size of the equipment relative to operation size听determine efficiency, but also the need for the听equipment itself. If there is equipment that hasn鈥檛听been used in a while and is sitting around the farm,听consider selling. This can provide a considerable听source of cash, especially with the price of machinery听increasing. Not only will this provide a cash source,听but it will also eliminate upkeep and insurance听expenses of maintaining the equipment. Reliable farm听labor is becoming difficult to procure and expensive听to keep. Efficiency in labor resources is essential听during inflationary periods. Ensure labor resources听are being used to maximize efficiency and managed at听the best of your ability. Although it can be difficult to听eliminate positions, it might prove to be necessary.
Farming enterprises are businesses and should always听be evaluated yearly to determine the most听efficient use of resources to maintain profitability听objectives.
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Keep Cash
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Last year was a phenomenal one for producers not听only in Delmarva but nationwide. Last year was the听optimal growing season, and it was complimented by听increasing prices, particularly in grain. Many听producers had more cash on hand going into the听2022 growing season than in years past. When a cash听excess is available, producers often consider ways to听benefit their operation over the long run using that听cash. Producers may be tempted to opt into large听capital purchases or pay off long-term debts. During听the current economic environment, a greater option听may be to hold onto cash reserves. Cash reserves can听be used to offset any shortfalls in being able to pay听back expenses, particularly when higher input costs听put pressure on a crop's ability to cash flow. Holding听a cash reserve will potentially limit, or even prevent,听the need to refinance operating expenses over a long听period of time.
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Lock Interest Rates
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Anyone who remembers farming during the farm听financial crisis of the 1980s remembers the interest听rates of that time. Unfortunately, interest rates are on听the rise. Any long-term debt that you carry now, could听be at a cheaper rate than you could borrow money for听in the future. There is less incentive to pay off debts听right now with lower rates to turn around and need to听borrow money at a higher rate. Let your money work听for you. If you have term loans that need to be听consolidated or are not at a fixed rate, consider talking听to your lender immediately about locking in current听rates. You can save your operation a substantial听amount by securing lower interest rates and reducing听the amount of interest cost during the time of the听loan.
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Conclusion
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Operating an effective farming operation can be听extremely difficult when external factors out of a听producer鈥檚 control brings financial difficulties to the听operation. Fortunately, lessons learned during the听farm crisis of the 1980鈥檚 have taught us the听foundation to weather challenges such as what we are听facing today.
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