Transcript Managing Capital /Financial Risk Craig Binkowski Southern Michigan Bank & Trust Coldwater $ Farm Business Risk Profile Production Marketing FARM Business Human Resources Legal Financial (Health & Labor) We will focus only on Production, Marketing.

Managing Capital
/Financial Risk
Craig Binkowski
Southern Michigan Bank & Trust
Coldwater
$
Farm Business Risk Profile
Production
Marketing
FARM
Business
Human
Resources
Legal
Financial
(Health & Labor)
We will focus only on Production, Marketing and Financial today
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Topics in Financial Section
• Financial Balance Sheet (What’s at risk?)
• Cost of Production / Revenue Requirements:
– Total Economic costs
– Cover Direct Cost
– To Maintain Equity
– Meet Cash Flow Demands
• “Cost of Production” Worksheet
• Incorporating Financial Information into Risk
Management / Control Decisions
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Financial Risk Management
• Increase Equity through Farm Profit
– Net Worth increase without inflation in asset
values
• Meet Cash Flow Demands
• Monitor cost & availability of Debt Capital
– Interest Rate Risk
– Sources of Capital
• Financial Information for measurement and
monitoring is available and used
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3 Basic Financial Statements
1. BALANCE SHEET:
Assets, liabilities, and net worth
Annual Change in Net Worth
2. INCOME STATEMENT:
Inventory Adjusted (Accrual)
3. Projected CASH FLOW:
After Scheduled Term Debt Principal &
Interest Payments, Family Living,
Income Taxes
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Example Farms for the Game:
Designed to Simulate Today’s
Market Environment
• Green = Low Debt Farm (Sorry)
• Yellow = Moderate Debt Farm
• Red = High Debt Farm
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Balance Sheet
• Current balance sheet tells you:
– Financial position of your business/Self
– Your capacity to withstand risk
“Take a Hit” and remain solvent
• Three-five years of balance sheets tell you:
–
–
–
–
Trends in equity of your business
Need Both Cost Basis (Book Value)
And Market Value
Dual Column Balance Sheet
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Balance Sheet Debt Levels
Current Farm Assets
Intermed. Farm Assets
Long Term Farm Assets
Total Farm Assets
Low
Medium
High
431,000
431,000
431,000
+ 616,000
616,000
616,000
+ 974,000
974,000
974,000
=
2,021,000 2,021,000 2,021,000
Current Farm Liabilities
50,782
Intermed. Farm Liabilities + 82,014
Long Term Farm Liabilites + 271,458
Total Liablilities
= 404,254
Equity
Debt to Asset Ratio
Equity to Asset Ratio
317,516
376,586
253,300
412,502
338,634
524,562
909,450 1,313,650
1,616,746 1,111,550
20
45
80
55
Page 4 FINLRB output
707,350
65
35
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Income Statement:
• History:
– Did your business make or lose money last year?
• How much?
• Was your neighbor’s experience similar?
– What has been the past performance of your
business? Relative to your neighbors?
• Projections (pro-forma):
– What will be different from the past? Why?
– Do you “expect” the business to make a profit?
– How much can revenue fall due to price and/or
yield shortfalls before there is a loss?
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Income Statement
Gross Farm Income
Non Interest Cash Exp.
Interest Expense
Net Cash Farm Income
Inventory/Accrual Adj.
Net Operating Profit
Depreciation
Net Farm Income
+
=
+
=
=
Low
563,284
393,945
30,576
138,763
0
138,763
60,000
78,763
Medium
563,284
393,945
68,714
100,625
0
100,625
60,000
40,625
Page 2 of FINLRB output
High
563,284
393,945
109,271
60,068
0
60,068
60,000
68
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Liquidity - Cash Flow Statement
• Ability of your business to meet its cash flow
obligations
• Accounts for all sources and uses of cash
including debt and capital activity
• Helps you assess how much room there is for
“stuff going wrong” -- RISK!
• Helps you assess if adjustments need to be made
in the financial structure of your business.
• Does NOT tell you if your business made a profit!
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Liquidity- Cash Flow Statement
Net Cash Farm Income
Nonfarm Income
Net Cash Available
Family Living
Income Taxes & Social Security
Cash Avail. for Princ. Payments
Farm Interest Paid
Cash Avail. for P& I Payments
Total Sched. Principal & Interest
Cash Avail. after Loan Payments
Cash Required for Replacement
Cash Surplus or Deficit
+
+
=
=
+
=
=
=
Low
138,763
0
138,763
30,000
25,626
83,137
30,576
113,713
58,655
55,058
40,978
14,080
Page 3 of FINLRB output
Medium
High
100,625
60,068
0
0
100,625
60,068
30,000
30,000
11,369
10
59,256
30,058
68,714 109,271
127,970 139,329
184,428 176,312
(56,458) (36,983)
0
13,521
(56,458) (50,504)
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Change In Net Worth:
• Did Your Net Worth Increase last year? Or
Decrease? Trend? Why?
– From Retained Earnings out of Farm Profit?
– From Asset Inflation? Machinery? Land?
– From Contributed Capital? (Outside
sources)
• Do you expect your net worth to increase next
year? Or, decrease?
• How much room do you have for “stuff to go
wrong” RISK!
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Change in Net Worth
Net Farm Income
Net non Farm Income
Family Living
Income Taxes
Change in Net Worth
+
=
Percent Change in Equity
Low
78,763
0
30,000
25,626
23,137
Medium
40,625
0
30,000
11,369
(744)
High
68
0
30,000
10
(29,942)
-0.1%
-4.2%
1.4%
Hand calculate the % Change in Equity
Page 4 of FINLRB output
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Understand the Numbers for Your
Farm Business!
• Critical in today’s environment
• Understand what the numbers mean
and signal
• Monitor Business EVERY year …
routinely
• Use professional assistance if needed
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Cost of Production
Roger Betz
District Extension Farm
Management Agent SW Michigan
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Cost of Production Worksheet
• Allocates Overhead cost to each acre and
combines with Direct Cost to determine
“Cost of Productions” for various crops
• “Cost of Productions”?
–
–
–
–
Economic
Direct Cost
Maintain Net Worth
Meet Cash Flow Demands
• Useful in Marketing and Crop Insurance
Decisions
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1. Paid on Yield per Acre in Bushels
2. TIMES Selling Price per Bu
3. EQUALS Gross Income per Acre
DIRECT COST/AC
4. Seed
5. Fertilizer
6. Herbicides
7. Insecticides
8. Drying Fuel
9. Crop Fuel & Oil
10. Crop Repairs
12. Crop Utilities
13. Crop Haul & Truck
14. Crop Marketing
15. Crop Insurance
16. Other
17. TOTAL DIRECT COST/Ac
CORN
SOYS
128.5
x $2.10
=$269.85
43
$5.30
$227.90
$25.00
$26.40
$54.80
$13.00
$20.35
$18.75
$__________$__________
$14.00 $__________
$9.35
$7.50
$23.60
$20.20
$2.40
$1.50
$15.42
$5.16
$__________
$1.72
$__________$__________
$__________$__________
$164.92
$94.23 $
Cost of Production Worksheet - page 2
Cost of Production - Overhead
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
Acres Cropped
Interest
Hired Labor
Land Rents
Machinery Leases
Real Estate Taxes
Farm Insurance
Farm Utilities
Other Expenses
Depreciation
Total Accounting Overhead Cost
Cost of Production Page 2- Medium Debt
2,000
68,714
25,000
82,500
0
14,100
12,000
1,200
0
60,000
263,514
$
Economic Cost of Production
29. Total Accounting Overhead Cost
263,514
30. Value of Unpaid Labor
31. Value of Unpaid Equity Capital
32. Total Economic Overhead Cost
45,664
66,693
375,871
33. Total Economic Overhead Cost/Ac
$187.94
CORN
$352.86
SOYS
$282.17
$2.75
$6.56
34. Total Economic Costs/Ac
(line 17 for each crop) PLUS (line33)
35. Total Economic Cost / Bu
Cost of Production Worksheet
Page 2 - Medium Debt Farm
$
Total Direct Cost
36. Acres planted each crop
37. Total Direct Cost/Ac (line 17)
CORN
1,000
SOYS
1,000
$164.92
$94.23
38. Direct Cost per Bushel
$1.28
For each crop (line 37)DIVIDED BY (line 1)
39. Total Direct Cost for Crop
164,920
For each crop (line 36) TIMES (line 37)
$2.19
40. Total Direct Cost for all crops combined
Cost of Production Worksheet Page 2
Medium Debt Farm
94,230
259,150
$
Revenues to Maintain Net Worth
41.
42.
43.
44.
45.
46.
47.
48.
49.
Total Economic Overhead Cost (line 32)
Minus Gov. Program & Other Net Incomes
Minus Value of Unpaid Equity (line 31)
Plus Income Taxes
Minus Value Unpaid Family Labor (line 30)
Plus Actual Family Living & Other Draws
“Maintain Net Worth Overhead Cost”
“Maintain Net Worth Overhead Cost” per Acre
Total Crop Revenues Needed to Maintain Net Worth
50. Total Revenues Needed / Acre
(line 37 for each crop) PLUS (line 48)
51. Maintain Net Worth per Bu
+
+
=
375,871
65,534
66,693
11,369
45,664
30,000
239,349
$119.67
498,499
CORN
SOYS
$284.59
$213.90
$2.21
Cost of Production Worksheet Page 2
Medium Debt Farm
$4.97
$
Revenues to Meet Cash Flow
52.
53.
54.
55.
56.
57.
“Maintain Net Worth Overhead Cost”
(line 47)
Minus Depreciation
(line 28)
Minus Interest Expense
(line 20)
Plus Scheduled Principal and Interest
Plus Cash required for Capital Replacement
“Meet Cash Flow Demands Overhead Cost”
239,349
60,000
68,714
184,428
0
295,063
+
+
=
58. “Meet Cash Flow Overhead Cost” per Acre
$147.53
59. Total Crop Revenues Needed to Meet Cash Flow Demands
554,213
60.Total Crop Revenue Needed per Acre
(line 37 for each crop) PLUS (line 58)
61. Meet Cash Flow Demands per Bu
CORN
SOYS
$312.45
$241.76
Cost of Production Worksheet
Page 2 Medium Debt Farm
$2.43
$5.62
$
Break Even Income & Prices
“Cost of Production”
Medium Debt Farm
34. Total Economic Cost per Acre
35. Per Bu
37. Direct Cost per Acre
38. Per Bu
50. Maintain Net Worth per Acre
51. Per Bu
60. Meet Cash Flow Demands per Acre
61. Per Bu
CORN
SOYS
$352.86
$2.75
$164.92
$1.28
$284.59
$2.21
$312.45
$2.43
$282.17
$6.56
$94.23
$2.19
$213.90
$4.97
$241.76
$5.62
$
Break Even Incomes & Prices
“Cost of Production”
High Debt Farm
34. Total Economic Cost per Acre
35. Per Bu
37. Direct Cost per Acre
38. Per Bu
50. Maintain Net Worth per Acre
51. Per Bu
60. Meet Cash Flow Demands per Acre
61. Per Bu
CORN
SOYS
$361.01
$2.81
$164.92
$1.28
$299.19
$2.33
$309.47
$2.41
$290.32
$6.75
$94.23
$2.19
$228.50
$5.31
$238.78
$5.55
$
What Percent of Equity are You
Willing to Risk?
Net Worth
5%
10%
15%
20%
25%
Low
Medium
1,616,746 1,111,550
80,837
55,578
161,675
111,155
242,512
166,733
323,349
222,310
404,187
277,888
High
707,350
35,368
70,735
106,103
141,470
176,838
$
Can I use Risk Management Tools
to Minimize Equity Loss?
Crop Revenue Needed to
Maintain 100% of Equity
Corn per Acre
Soybeans per Acre
Low
Medium
469,540 498,499
$270.12 $284.59
$199.43 $213.90
High
527,697
$299.19
$228.50
10% of Equity Loss
% of Crop Rev. Can Lose
Corn/Ac (Protect 90%)
Soys/Ac (Protect 90%)
Corn / Bu (Protect 90%)
Soys/Bu (Protect 90%)
161,675
34.4%
$177.11
$130.76
$1.38
$3.04
70,735
13.4%
$259.09
$197.87
$2.02
$4.60
111,155
22.3%
$221.14
$166.21
$1.72
$3.87
$
Lines 49 and 50 Cost of Prod. Worksheet
Key Questions for Your Farm Business :
1. Appropriate Financial Information Available?
Historical, Current, and Future
2. Adequate Understanding of Financial Conditions and
Risk Positions?
3. Realistic Plans & Underlying Assumptions?
4. What level of Equity Protection can Risk tools
provide?
5. Should you utilize Financial Risk Management
Strategies?
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STOP!
• What is the key financial information for your
farm?
• What are the revenues required to:
•
Meet Economic Cost
•
Cover Direct Cost
•
Maintain Net Worth
•
Meet Cash Flow Demands
• Start to think through your crop insurance
and marketing plans
$