The Unforgiven – When rain is too much of a good thing.
“To a farmer, the rain is a beautiful song until it starts repeating the same verse for three weeks straight” – Unknown author
It was Will Rogers who wrote, “The farmer has to be an optimist, or he wouldn’t still be a farmer”. As I write this blog, a large percentage of Western Canada has not only watched their crops suffer under the weight of the rain, but are now preoccupied filling sandbags to save their local communities. Only in primary production agriculture can Mother Nature take you from seven years of drought to flash flooding across less than 540 kilometers of land base from east to west in Saskatchewan.
It was a couple of weeks ago that I wrote an editorial on “sleeping through a storm”, how preparation is key in dire situations. It feels only right now that we discuss the road ahead for areas devastated in the last month. So, without throwing more salt on the wound, here are a few areas farms need to prepare for in the months ahead.
Transparency with Lenders
Against popular opinion, your lending institutions are not the enemy. In fact, in times like this, your relationship manager may be the one person who can help you find options. Too often in times like these, we tend to believe that nobody is coming to save us. While this is only partial truth, we must also remember that in a storm, a herd of buffalo turn into the wind to get through it more quickly. The first step for farmers in this situation is to turn towards the storm.
While the office may not be the place you want to spend your time, this may be the most important remedy for the situation. Are the books up to date? Do we know what cash flow is like for the coming months? What is the worst-case scenario for the farm? All these questions need to be answered before we ever move into discussions with a lender. Going to your bank with a plan, and going to the bank looking for a solution, are two very different positions. One will be favourable, one will not.
Identifying the current weaknesses is also imperative. Are we going to be tight on cash flow for the fall with limited revenue? Will we be able to make repayment on all our obligations moving forward? Do we have additional equity and leverage to provide a solution? If your balance sheet is in a strong position, and you have managed your costs and insurance to a basic level, most of these discussions with the bank will be answers to your anxiety. The best time for this discussion was yesterday; the second-best time is today. Approaching a lender after harvest is the “kiss of death” for most well-laid plans.
Transparency with Insurance
Most producers we work with identified the worst-case scenario before a seed was ever put into the ground. Insurance was a strategy, no different than crop rotation, that was built to mitigate and manage risks between the strength of the balance sheet and the risk of the income statement. A mix of cash availability, unsecured equity, and cost of production allows many producers to identify a relative amount they are comfortable risking per year. Insurance does the rest.
Crop insurance is just math; dollars and cents. The number of insurance estimates I have done over the last few weeks shows the damage in Western Canada. But to be fair, it also shows the strength of a portion of the producers. By the end of June, they will know what this devastation looks like, and they are already working on solutions to mitigate what happens next. It is easy to get caught watching the damage unfold online or documenting what is happening in the field. But the strongest farms are also spending time in the office, working through the numbers and building the next plan.
Know your insurance products and how they work. Which ones require established crops, which ones are best on money spent, and which ones will pay and when? All these questions will dictate the plan moving forward, not only with the cash flow planning, but also with your banks and other advisors. The ability to understand your lifeline is something many operations often take for granted.
The Cascading Effect – Tax
A lesson was learned over some tough conversations. Unlike other industries, the worst year for a tax problem is the one where you don’t grow a crop. Sounds backwards, doesn’t it?
For any other industry, the worst year is the lowest net earnings and often the lowest tax burden. For agriculture, most producers remember to cash their crop insurance cheques; they just forget the tax effect. When you grow a crop, most producers stage sell over months if not years. The cash revenue is earned over a longer period and that usually crosses multiple tax years. When you rely on insurance, the cheque is often received and cashed in a short time window. This is what we call the cascading effect.
Many producers today carry their crop inputs and expenses over many months during the growing season. Once the combines hit the field, the cheques start replenishing the account. The problem with insurance is that we need the cash to pay the bills, but the insurance cheques are received in a short period of time. After what is most likely one of the worst years of your career in farming, you just want to cash the insurance cheque and move on to next year. Then the tax bill comes.
We could go into numerous areas that a farmer needs to prepare for the coming months if the rain has not stopped. Without going into detail, there will be ramifications operationally and agronomically that could take months or years to repair. The business planning is meant to give you the time and the opportunity to do so. The path is not simple, but in farming, what is?
“Farming looks mighty easy when your plow is a pencil, and you’re a thousand miles from the corn field.” – Dwight D. Eisenhower.
