Understanding Financial Risk....

is yet another portion of the Risk Management "pie".

Financial Risk has 3 basic parts:

- the cost and availability of debt capital
- the ability to meet cash flow needs in a timely manner
- the ability to maintain and grow equity

Cash flow is very important because of so many ongoing farm obligations, i.e. cash input costs, cash lease payments, tax payments, debt repayment, and family living expenses. Often, off-farm employment can be a financial risk strategy. It ensures that living costs are met, raises the standard of living and may reduce the need to liquidate farm assets.

Financial risk should be managed through sound planning and financial control. Monitor your ability to bear financial risk continuously.

A set of well-maintained financial records is critical to maintaining financial control of a farm or ranch. This helps in evaluating past performance and planning for the future. Some essential financial documents include the balance sheet and statement of equity, income statement, and project and actual cash flows. As the operation grows, more records will be needed – ratios such as debt-to-asset, debt-to-equity, and asset turnover are important monitoring tools.

There isn’t much anyone can do about interest rate risk; however, by lowering your debt-to-asset ratio and having crop insurance as well as a sound marketing plan, you can sometimes influence your interest rate. Add maintaining accurate financial records and a consistent record of timely repayment of loans and you can expect continued access to debt capital when you need it.

Marketing Risks

Continuing our Risk Management discussion, I want to comment on Marketing Risks. Marketing is the part of farming operations that transforms productions activities into financial success. Often unexpected circumstances, like weather or government action, can impact major changes in crop and livestock prices. With agriculture becoming an ever growing global market, these changes can come from world factors – other farmers’ weather and other countries’ governments can affect your prices.

Marketing plans and strategies should be developed with your operation in mind. Keep these items in mind as you develop your plan:

Know the level of risk you are comfortable with. Marketing is not an exact science, so you must understand your level of risk tolerance and have a strong understanding of your current financial position.

Be willing to learn; you may need help developing your marketing plan. Find a reputable futures broker, elevator operator, financial planner or farm consultant.

Develop an integrated management approach to your business. Farm business decisions should be made taking every aspect of the operation into account: production, financial, legal and human resources. Marketing decisions often involve contract agreements that can significantly affect financial plans.

To manage your marketing risk you need a marketing plan. The goals and objectives of your operation should drive the marketing plan. Understand production costs, know your break-even price, develop targets for your plan by analyzing supply and demand projections, be aware of prices received in your area in previous years and know your cash flow requirements – including family living needs.

It is important to remember that the numbers and plan that works for your neighbor may not be the most appropriate plan for you. Know your goals and know your needs. And be ready!

The Biostar

As I've mentioned previously, ArborOne is a proud member of the Farm Credit System. We share the concepts; we also share the biostar.


Almost all associations and organizations with ties to Farm Credit incorporate the biostar in some way – either in their logo or tagline.

So what exactly is a biostar and what does it represent you might wonder.

The biostar is the result of a national effort in the mid-80’s to bring all the various entities recognized as part of Farm Credit under one identifiable symbol – including all the Federal Land Banks and Production Credit Associations.

The design of the biostar is very deliberate, with each element representing something about Farm Credit.

• The leaves represent the system entities including the Farm Credit associations, the Farm Credit Banks and our national support structures like the funding and services corporations.
• The roots represent the grassroots support or our members and our roots in rural America and the cooperative system.
• The star represents light and direction.
• The color ‘green’ represents the rural nature of our business – which is a green and growing industry that we serve.
  

Having just celebrated the 4th of July holiday, I would be remiss to not mention the importance of farmers, ranchers and agriculture in the forming of the United States. The tradition of the family farm and the values born in that tradition, are reflected in the founding documents that guide our Country still.

ArborOne Financial, a proud member of the Farm Credit System, always.