MANAGING RISK
1. Build Financial Reserves
When navigating a softening farm economy, farmers can strategically rebuild their capital reserves by prioritizing investments, leveraging equity, or restructuring debt. Avoiding speculative ventures, stress-testing various financial scenarios, and fine-tuning debt strategies are all important steps in mitigating risk and protecting liquidity.
Given the current scenario of rising interest rates, farmers are advised to adopt a proactive approach and view interest rates as an input to be scrutinized, similar to fertilizer or seed prices.
To mitigate interest expenses, farmers can explore short-term grain sales, allowing them to capitalize on current market conditions. Farmers might also prioritize paying off debts with high floating interest rates or investing in instruments like certificates of deposit (CDs) with more favorable rates if possible. Just be sure to keep a close eye on potential penalties involved with early withdrawal.
With a forecasted current ratio of two percent, there is a robust carryover of working capital. Maintaining high solvency and liquidity will be key.
BOTTOM LINE
With interest rates anticipated to remain elevated, farmers are urged to assess their balance sheets and repayment periods critically, aligning them with their risk/return preferences. By methodically addressing these financial considerations, farmers can navigate the challenges of a softening farm economy and fortify their financial positions.
MANAGING RISK
2. Prepare for Taxes
When it comes to strategic tax planning for farmers, careful consideration of income levels and financial goals is essential in developing a tax plan that fits your unique needs.
If you are anticipating higher income in the next year, here are steps you can take to increase taxable income for the current year.
TIMELY SALES OF GRAIN AND LIVESTOCK
Consider selling grain and livestock in the current year instead of carrying them over to the next, thereby boosting current-year income.
EXPENSE PAYMENT TIMING
Delay payments for fall-related expenses, such as seed, fertilizer, lime, and fuel, prioritizing those without cash discounts or minimal finance charges.
REVENUE COLLECTION
Ensure timely collection of custom work fees, rents, and other amounts owed before year-end.
DEFERRED PAYMENT CONTRACTS
If holding deferred payment contracts for grain or livestock, elect to recognize income on your 2023 tax return, even if proceeds will be collected in 2024.
DEPRECIATION STRATEGIES
Consider depreciating assets like limestone and heavy fertilizer applications instead of deducting them in the current tax year.
OFF-FARM INVESTMENTS
Evaluate off-farm investments and consider selling those with gains to generate income.
If you anticipate a drop in income, there are several ways you can decrease taxable income for the current year.
DEFERRED PAYMENT CONTRACTS
Sign deferred payment contracts for grain and livestock to lock in sale terms while deferring receipt of proceeds to the following year.
PREPAID EXPENSES
Deduct prepaid operating inputs (feed, seed, fuel, fertilizer, chemicals, supplies) that will be used in the next year, following guidelines in IRS Publication 225.
INTEREST PAYMENTS
Pay any accrued interest up to year-end, even if not due until the next year. Note that prepaid interest, insurance, or cash rent cannot be deducted.
CROP INSURANCE PROCEEDS DEFERRAL
If facing a crop insurance loss due to yield loss, defer reporting of crop insurance proceeds if it aligns with normal practice.
EQUIPMENT PURCHASES AND REPAIRS
Make equipment purchases and significant repairs in the current year, ensuring availability for service before year-end to take advantage of IRS Code Section 179 Expense Election or bonus depreciation.
RETIREMENT PLANS
If no retirement plan is established, consider doing so in the current year. Various options are available, including traditional IRA, Roth IRA, SEP IRA, and SIMPLE IRA, with some plans allowing setup until the tax return due date.
Source: Zwilling, B. "Strategic Tax Planning for 2023." farmdoc daily (13):211, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, November 17, 2023.
BOTTOM LINE
Farmers should tailor tax strategies based on their unique financial situations, consulting with financial advisors to ensure compliance with all requirements and to make informed decisions aligned with their business goals.
Disclaimer: This material has been prepared by AgAmerica for informational purposes only and should not be relied on for tax, legal, or accounting purposes. You should consult your own tax, legal, and accounting advisers prior to filing your tax return.
BOTTOM LINE
Enhancing marketing plans is crucial for farmers to navigate the uncertainties of the agricultural market. It allows them to optimize revenue, manage risks effectively, and make informed decisions to ensure long-term profitability. Regularly reviewing and adjusting marketing plans based on changing conditions is a key aspect of successful agricultural management.
MANAGING RISK
4. Build Weather Resilience
In the face of increasing economic impacts or adverse weather, it’s important to face this challenge head on and adapt your operation as needed. Soil testing serves as a fundamental step, providing valuable insights into soil health and nutrient levels (not to mention the opportunity to maximize tax savings).
Building weather resilience varies across the nation, depending on the types of severe weather you’re up against. Explore strategies to increase your operation's resilience to severe weather in your area by clicking the links below.
BOTTOM LINE
Weather is among the top uncontrollable factors farmers face in 2024. Prioritizing soil health and being proactive in seeking solutions to mitigate specific weather risk in your region is a necessary part of improving overall operational resilience.
MANAGING RISK
5. Have a Team You Trust
Last but certainly not least, having a reliable advisory team is paramount in navigating the expanding landscape of financial options. In agricultural finance specifically, terms and agreements can often be complex and laden with nuances. Without a team of trusted advisors, farmers and landowners may find themselves susceptible to misleading terms that could potentially lead to a worse financial position than when they started.
BOTTOM LINE
Farmers are gaining more financing options. But this optionality requires careful navigation. Having a team that can decipher these complexities ensures that decisions align with your goals. Trustworthy advisors should provide a shield against potential pitfalls and help you make informed choices that contribute to your long-term success and financial stability.