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