Tips on how to keep track of your farm's viability
If you're unsure how to analyze and understand your farm operation's viability for future financial success, here are some things to think about as you plan your business goals.
Joy Kirkpatrick, University of Wisconsin-Madison Extension specialist, and Katie Wantoch, Dunn County agricultural agent, presented an interactive webinar that went over components of farm viability: capacity, performance and resilience. Farm viability is determined using those concepts, allowing you to take a comprehensive look at your financial goals down the line.
Kirkpatrick said capacity is your farm's maximum level of value under normal operating conditions, noting that some areas of the farm might be working at capacity while others could be working under capacity. She said it's not always good to be working at maximum capacity because it could introduce financial risk, so you should decide what is best for your farm based on your financial situation.
It's important to consider how disturbances to the business, like weather events, labor shortages or financial changes, may affect your farm's level of capacity. You'll want to be in the position where the farm can manage those disruptions with limited waste and risk. And most importantly, you should consider if your farm is meeting its current demands and if it can meet future demands, including non-farm living expenses.
"Farm family income is usually central to the definition of viability, and it varies because of farm size, enterprise production and access to off farm income," Kirkpatrick said. "Does it have enough cows? Do you have enough acres? Do you have enough direct market customers or other types of direct marketing?"
Things to consider:
Do you have a budget?
Do you review past expenses to prepare for future expenses?
Do you have your goals written down?
Performance of your farm is an important component because it represents the profitability of your farm, where the goal is to turn your assets into revenue, Wantoch said. Make sure to stay on top of your financial status by understanding the value of your investments in land, livestock, equipment and other parts of the operation, she said.
Wantoch recommended filling out scorecards and other financial assistance tools to get a holistic look at your financial status. One model from the University of Minnesota shows you how to calculate your working capital, asset and debt ratios, net income, debt repayment capacity and other necessary parts of running the farm.
Liquidity (the ability of your farm to pay bills as they come due) and solvency (the ability of your farm to pay its debts upon being sold) is important to consider when looking at finances, especially when considering actual profitability and if you need to restructure your operation's finances, Wantoch explained.
"Debt intensive operations may earn little or no return on equity when their interest rates are high," Wantoch said. "On the other hand, if the farm's overall return on assets is higher than the cost of their borrowed money, the return on equity may be quite high, and net worth will grow rapidly. There are many sources out there for how to calculate these different things."
Things to consider:
Do you have a plan for increasing profit margin during low prices?
What is your cost of production?
What are your labor costs?
Resiliency is the farm's ability to absorb shocks and disturbances, like market changes, Wantoch said. A farm is also resilient if its able to reorganize and retain function during those changes, like maintaining the same farm identity. However, it's not bad to change the identity of the farm (what it produces) if the operator maintains the same core functions and principles they want to keep working with.
Families should also be thinking about and preparing for farm succession, Wantoch said. Succession is an opportunity to change the farm's functions, whether to expand or retract, based on what the family wants. It's also an opportunity to re-evaluate all of the farm's assets, investments and debts, she said. Wantoch added that debt can be useful for large and specialty farms if used right, because high interest rates often create problems for paying it back.
"Although many operate with little or no debt, a high debt load does not make farms less efficient," Wantoch said. "But those principal interest payments certainly do (limit) cash flow, and high efficiency farms are able to service a higher debt load safely, but that doesn't always mean that they are resilient. So there's two different things to look at."
Things to consider:
What risk management tools do you use?
How can you reduce costs?
What does your farm’s legacy look like?
Long-term viability involves what's called the "Seven Ds," Kirkpatrick said – death, disability, disaster, divorce, disagreement, debt, depression, dysfunction and denial, which all play a role in how the farm weathers serious family and financial events.
If you feel your farm is stagnating, Kirkpatrick says to look at the long haul: you should decide whether your operation can keep going as it is with a focus on efficiency or if it needs a redesign. And sometimes, the other options include a major restructuring of the operation or an industry exit.
"While the influx of government payments in 2020 may help a lot of farms in the short term for us up here in Wisconsin, especially in the dairy industry, there may be several farms that will need to analyze their viability in the upcoming year or two," Kirkpatrick said.