1 BUILD NEW REVENUE STREAMS
In agriculture, new technology rarely comes cheap. If you plan on making a jump-shift, not only will you need capital, you will also need to increase revenue to cover that extra debt, maybe even before you leap.
Anderson says he talks to low-debt, high-equity farmers in excellent financial positions who believe they re ready to move to the next level of technology. They re right, but only half right. Based on their debt position, they re eligible for the loan. However, when you project cash flow following the investment, the picture changes.
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In cropping operations, a custom business can sometimes speed up the pay-back on new technology. Consider a farm where a large square baler would save hours of labour but needs a big bale chopper to make it work. If you ask, it may turn out that several neighbours want straw chopping, and this new revenue stream may help pay for both the baler and the chopper.
With intensive livestock operations the question can be, which comes first, the production or the facility? Imagine a dairy family with 70 cows that wants to build a new freestall barn and eventually fill it with 200 cows. After taking out a building loan, they have less than 50 per cent equity and their extended net cumulative cash position including more principal payments and interest suddenly doesn t look as appealing.
Alternatively, they could start growing their revenue, in this case by slowly investing in cows and quota. Their current facilities were filled to capacity so they had to adopt some temporary measures. They milked in two shifts and rented a nearby barn to move their dry cows and heifers out of the old barn. This made room for more cows. Four years later, they had to buy only 20 kilograms of quota to fill the 200 cow barn and were now in a much better net-revenue and debt-servicing position to acquire financing.
2 OWNING VERSUS LEASING
KPMG s Anderson doesn t mince his words: You need to be open to all business relationships that allow for increased productivity and efficiency.
Consider custom work, joint venture purchases, and informal agreements to share equipment. It could be back to the barter system. For example, one farmer might no-till drill some pastures in return for getting manure spread on his land. Both farms benefit.
Increasingly, these relationships can involve working with relatives or non-relatives, or long-term neighbours or new immigrants. You can have written formal agreements or an informal handshake. Of course, you need to protect yourself and balance the risk of sharing with the risk of not adopting the technology. Part of the answer may be multiple users, says Anderson.
Leasing equipment instead of owning may be another option, or hiring a custom operator.
You can lease almost anything these days, from grain storage to presses for alternative fuel. It s not just combines and tractors any more. Leasing may help you with an expansion or taking your farm business in a new direction that you otherwise couldn t afford.
If you can acquire new or used equipment without impacting your debt-to-equity ratio, then that may be a motivator in obtaining a piece of equipment that can help you to earn more revenue, or maybe it will save you time in helping you to be more productive, says Natalee Pollard, agricultural account manager for Winnipeg-based National Leasing.
A custom operator may have a yield monitor on their combine that matches with the GPS maps from your sprayer. By hiring or leasing the combine instead of buying it, you can make the jump-shift, allowing you to access the latest technology without accumulating more debt.
In short, a jump-shift is only useful if it doesn t destroy your cash position.
