Note from Nelson

Coping With High Inputs

As a result of high input costs, farmers and ranchers are having to spend a larger share of their working capital on production costs. Therefore, when more working capital goes towards production expenses, less can be utilized for expansion and investing in the growth of your operation, or even to the simple things we like to enjoy in life.

Before making any decisions on how to reduce production costs, it is important to study and understand the effects that any changes may have on your operation.

Before purchasing seed, pesticides, fertilizer, feed or animal health products, it's crucial to conduct research and compare costs and quality between suppliers. Instead of simply choosing the cheapest option, it's important to investigate and seek input to ensure that the quality of the product still meets your needs and allows the performance that you expect. Generally speaking, you have more control over your costs than you do over market prices, so time spent making the best decision on how your money is spent is critical to your operation's financial success.

Prioritizing machinery and equipment repairs is critical. While new farm equipment has the potential to yield benefits, it may not be cost-effective for your operation. Supply chain issues have made securing new equipment more difficult and has inflated the costs. Before purchasing new equipment, there are various factors to consider that indicate whether or not purchasing new equipment is cost effective. Carefully examine every capital purchase that will require additional debt. Ask yourself if the expenditure will generate the cash flow needed to pay for itself. If the new item can't create enough new cash to pay for itself over a reasonable period of time, defer the purchase. The point being, it may be more beneficial to your balance sheet to postpone machinery upgrades right now and fix existing equipment in anticipation of lower prices in the future.

Look at your debt structure. Finance long-term assets, like real estate, with long-term debt. Finance shorter-term assets, like machinery, with shorter-term debt. Is it possible to increase your long-term debt to pay down your short-term debt? Before deciding to use your long-term equity, make sure your need is extremely significant. Before going in to visit with your banker, prepare for your financial review. Have current inventories, cash flows and balance sheets ready, and provide the information your banker requests. If you are having financial problems, put your thoughts about how to resolve them on paper so your banker can review them with you. Oftentimes, traditional lenders do not understand the unique and diverse needs of farm or ranch operations. As a result, some loans do not actually set farmers and ranchers up for financial success. However, restructuring farm debt with a lender who understands the specific needs of our operation can repair a shaky financial foundation. Many times by consolidating existing debt into a new loan with lower payments, you can increase your working capital to invest in operational upgrades and improvements. In addition, consolidating multiple debts into one loan is easier to keep track of and manage. Deal with financial problems as soon as they arise. Talk to your banker early and often. A good way to avoid serious financial problems is to identify and resolve them early.