Greatest Threat to Net Farm Income and Cash Flow
Dr. David Kohl, Professor Emeritus Agricultural and Applied Economics, Virginia Tech University
The COVID-19 pandemic has had profound effects on the income statement, cash flow and balance sheet of many agriculture producers. As we wrap up 2020, there will be a group of producers who were laser-focused on their management and benefited from the recent increase in commodity prices. This, coupled with government stimulus checks, will yield bottom-line profitability that hasn’t been seen since the commodity super cycle. Other producers who were not as fortunate will use the government support payments as a cash flow bridge.
So, what are the biggest threats to net farm income and cash flow for 2021 and beyond? For many, the answer depends on their unique situation.
For those who examine financial trends, pay particular attention to government payments. Since 2016, government payments have contributed to about one-third of the net farm income nationwide. If government payments represent 50% to 100% of net farm income, Houston, you might have a problem! Government stimulus checks are at record levels and are not sustainable long-term. Other sectors of the economy will be competing with the agriculture industry for dwindling government stimulus. One must be proactive and have a plan for the post-government payment period.
Other producers will view international trade negotiations as the largest potential threat. What will happen to exports after China rebuilds its hog complex and continues to expand trading partnerships around the globe? Demand for commodities outside of China, weather abnormalities in production pockets of the world, and the value of the U.S dollar in relation to trading partners will impact economic fortunes for U.S. agriculture producers.
For some producers, the ability of supply and marketing chains to operate effectively, and the human and economic health of integrators and large agribusinesses will be top of mind. Any disruption could place a temporary hold on revenues or affect the ability to timely market crops and livestock, thereby impacting production and efficiencies.
Inflating expenses related to technology, taxes and labor can be a silent killer of cash flow, particularly if commodity prices decline. Producers dependent on nonfarm income and off-farm employment must closely monitor unemployment trends and wage growth. Finally, changes in consumer trends, such as substitutes for traditional agriculture products and niche markets, and increased enforcement of regulations will be strategic challenges.
As we move into 2021, take some time to determine what your biggest threat to net farm income and cash flow will be. Then, develop a game plan to capitalize on opportunities these challenges may present.
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