Have you Locked in Positive Working Capital Changes
FarmDoc Daily issued a report on how recent crop price increases have improved working capital for the 2016 crop. The report went through the working capital changes for Central Illinois Lower Productivity Farmland assuming a 50/50 corn/soybean crop mix. The working capital changes were shown for owned, cash rent and crop share farmers on a per acre basis.
Farmers who owned their ground would see their working capital increase from a negative $16 to a positive $45. Cash rent would decrease their working deficit by $60 (going from negative $106 to negative $46). Crop share farmers would see their negative $66 per acre drop to negative $36 (a $30 gain).
However, this is predicated on the price increases from March to June being realized by the farmers. Corn prices rose from about $3.50 (December futures) to almost $4.50. Farmers had multiple days to lock in prices between $4.35 and $4.50 (based on futures); however, as we seen, it only took two days to eliminate almost 40 cents of this gain.
This may a year to lock-in singles and not try to hit home runs. Yes, there may be a weather scare that will force prices higher, but a farmer can continue to use call options to take advantage of that (assuming they want to incur the premium cost). Your banker will appreciate hitting a single and not striking out especially when it comes to working capital. Working capital is the oil that keeps a farm running smoothly. If you run out of this “oil”, it is just like an engine that runs out of oil – You are done. Don’t let that happen to you.
Paul Neiffer, CPA
CliftonLarsonAllen, LLP
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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