Connecting Working Capital and Wheat Marketing

After attending a wheat marketing meeting for lenders and farmers, I set out on a quest to learn about two critical aspects of the farm industry. The meetings were held to present wheat marketing strategies and proposals suggested by farmers to lenders.

After inviting lenders to the first meeting, one question was asked: “From your seat, what is the biggest concern on-farm?” We got a lot of interesting responses, but one senior lender strongly replied, "That’s simple, WORKING CAPITAL."

“What exactly is working capital?” I asked. He went on to describe it in detail from his perspective. I've been trying to link working capital and grain marketing since that conversation. I see hundreds of wheat marketing transactions with farmers in my position as a farmer’s accountant. As a result, I've established some best-practices rules-of-thumb.

At the time, I knew very little about working capital. In my view, I've been able to link the two through conversations with lenders and digging into accounting, but I have yet to convince the farm that it's necessary to connect working capital and wheat marketing. Many farms, understandably, do not want to discuss their financials with the grain buyer. Perhaps I should "stick to my knitting" and concentrate solely on grain purchases, but I am convinced that linking these two aspects of the business would positively affect the farm.

In this post, I suggest that the farm keep track of working capital every month and make it available to all stakeholders. If he doesn't have any stake in your estate, he can only suggest. If you don't agree with the idea, keep practicing as normal. I see three advantages of keeping track of working capital. Since I don't farm and don't have volunteers to conduct the testing, I can't validate the hunch without presenting it to a larger audience. I'd like to hear from farmers and agricultural lenders who are already tying working capital to grain marketing decisions.

Surplus working capital allows you to expand your farm or reduce your debt.

Working capital tracking on the farm would make the farm a star client with the lender and put the farm operator/manager in charge. Working capital is the ability to borrow money. In crop peril and emergencies, working capital serves as self-insurance and self-financing. On the balance sheet, working capital equals current assets minus current liabilities. A farm's working capital should be held at a safe amount. In these difficult times, more lenders are relying on cash flow rather than collateral to make loans. Working capital is a major problem for lenders. The right amount of working capital would demonstrate that the farm will meet its obligations on time.

Farm investments would be triggered by excess working capital. Working capital, following crop insurance, is self-insurance in the face of crop peril. Working capital makes up the difference between the cost of production and the crop insurance indemnity.

I forecast three results of tracking working capital monthly.

1.    The farm will learn about the effect of grain marketing on working capital. This knowledge will help you make better marketing decisions, and vice versa.
2.    When the farm's working capital is in excess, it will be identified. Surplus working capital would prompt conversations about farm investments, extension, and/or debt reduction.
3.    The farm will find insufficient working capital and work with their lender to develop a strategy to increase it.

Tracking working capital cannot be pleasant if a farm finds itself in a low-working-capital situation. What counts, however, is what is calculated. When one's success is evaluated, it increases. Every farm situation is different and is based on facts. For guidance on appropriate working capital and current ratios, consult a lender. Monitor your working capital monthly to see how it affects your wheat marketing choices. Make the results clear to the farm's stakeholders regularly.

Perhaps your balance sheet and wheat marketing will boost in unison?


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