Three Strategies For Coping With A Disastrous Growing Season – for Jul. 23, 2010

It’s over. I’m finished.” This was the first thing out of Robbie Rubberboots’ mouth at the end of June. We knew there was trouble when the phone quit ringing in early June. With only 50 per cent of the crop sown on a lot of farms guys knew there was a problem but didn’t know how big or where to start fixing it. Robbie is likely the start of a string of calls we expect to receive in the six months depending on when guys become aware and accept the fact that they don’t have cash to pay operating expenses or make those fixed November payments.

In the annual plan we prepared for Robbie last fall we did fixed charge analysis that looked like this:

Payments $127,000 Taxes $18,000 Rent $45,000 Living $35,000 Total $225,000 divided by 3,000 acres farmed = $75/acre

Robbie was comfortable with this last fall. He runs a cereal and oilseed rotation. He has some of the better land for the area and rent is generally running around $45 per acre. Robbie owns 2,000 acres and rents an additional 1,000 acres. With half his acres flooded or lost the reality of 2010 is shaping up much different than his plan. He is looking at the same fixed costs spread over half the acres, in addition to a significant loss on the remaining acres resulting from seed, fertilizer and chemical costs with no crop to provide any income.

Robbie was totally distraught for the first time in his farming career as he could not see where his farming career was headed. He found himself wallowing in self-pity and hoping for some government program. He realized that he would need a heck of a life jacket to keep his head above water with this approach. He called us because he wanted to go to the bank with a plan for his operation before the bank came to him with their own plan.

We put it as simply as possible: There are only three ways out of a financial challenge:

1. Earn your way out

2. Refinance your way out

3. Sell your way out

EARNING YOUR WAY OUT

The first step is to assess the damage done. Update your balance sheet including all assets and liabilities. Prepare an amended status quo projection to see the impact 12 months out. This quickly indicates the business’s ability to earn its way out of the predicament. Once you are convinced that your business can earn its way out, the next challenge is convincing your creditors that your plan works. This is accomplished by past supporting income and expense records and production records such as production insurance.

REFINANCING YOUR WAY OUT

If the business does not have the capacity to earn its way out in the next 12 months, changing the debt structure may be an option. This is the most challenging type of loan application for a lender. These applications represent more risk and often come in large numbers from an entire sector following a crisis. Changing the debt structure may involve terming out payables and operating loans, thus restoring working capital. Often this is associated with lengthening amortizations on existing debt to keep payments at manageable level. Requesting a period of interest only payments may also be an option that may be available. Terms are generally not very negotiable with these types of applications and interest rates are generally not the greatest. Offering real estate security and monthly payments generally helps the loan application.

SELL YOUR WAY OUT

The last and least preferred option is to sell assets to inject cash which could be used to:

1. Fund current year’s operating losses

2. Reduce debt

3. Make loan payments

What should you sell first? The best option is by far the toys. Ouch! These items — the boats, bikes, cottages and campers — tie up much needed capital with no return. Selling these items will have no impact on the operation’s productive units, and they can always be bought back. Selling these items will not incur a tax bill at yearend, either. Once these items are gone selling RRSPs or investments should be considered. Consulting your accountant and investment planner is a must before liquidating these assets. These items can also be put back but will carry tax implications.

Selling excess machinery would be the next best option. That haybine and baler no longer being used, the backup combine can all go because it’s better than the next option. The last option and likely least desirable is selling land. This will likely be very hard to replace and if the neighbours are all wet as well the market may be limited. It’s very important to realize that selling land or equipment will decrease the capacity of the operation going forward to make the remaining payments.

Understanding the sale of these assets as a business decision and removing the emotion is critical. Demonstrating to the rest of your farm management team including lenders, accountants and family that you’ve got a plan for the short term will benefit your business in the long run and help to avoid the stress of selling these assets with emotional attachment.

All this talk of trouble reminds us of a quote from one of our favourite fellow authors — “I learned there are troubles of more than one kind. Some come from ahead, others come from behind. But I’ve bought a big bat. I’m all ready, you see. Now my troubles are going to have trouble with me.”— Dr. Seuss

AndrewDeRuyckandMarkSloanemanagetwo farmingoperationsinsouthernManitobaandare partnersinRightChoiceManagementConsulting. Withover25yearsofcumulativeexperience, theyoffersupportinfarmmanagement,financial management,strategicplanningandmediation services.Theycanbereachedat [email protected] and [email protected] or204- 825-7392and204-825-8443.

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