Investments you can make during uncertain economic times.

If you’re like most farmers, you probably aren’t planning many major purchases these days. Profitability took a dive for most operators over the past year or two—especially for livestock growers. But, if you have the resources, it may be a good time to consider some modest and wise investments. Some will cost you more time than money.

We asked Daryl Oldvader, CEO of FCS Financial, if the time is right to upgrade or make new purchases for the farm. He referred to an old saying about real estate—that you should look for three things—location, location, location. “The three financial priorities of any producer in this environment should be liquidity, liquidity, liquidity,” said Oldvader, whose association provides financing to Missouri farmers. In other words, take care to limit your debt.

“Any investment that severely limits a producer’s access to available funds can be a risky decision in the current climate,” he said.

But you can dream, can’t you? One of the following investments might pay off down the road.

Grain storage and other facilities

Raymond Massey, an agricultural economist with the University of Missouri extension, said that demand for storage rose with increased ethanol production. “With the luster off of ethanol, on-farm storage is not likely to be as big of an issue,” he said. “On the other hand, this might be a good time to purchase (a unit) at bargain prices.” The cost of hog production facilities should also drop, he added.

A new corral

Joe Horner is a beef and dairy economist with MU extension. “Safe, low-stress animal working facilities are important so that livestock can be vaccinated and treated with minimal effort and minimal harm to people and animals,” he said. “High percentages of calves continue to arrive at livestock auctions without ever having had a vaccination or being castrated. This won’t change until working cattle becomes easier.”

Lime

“Most Missouri pastures need lime,” Horner said. “So year after year low pH holds back pasture production and pasture quality and lowers the effectiveness of the fertility present in the soils.”

Record-keeping software

Whether you raise livestock or crops, Horner makes a strong case that commercial producers should use a computer to track production numbers and benchmark against industry standards. “It’s critical to knowing your farm’s long-term viability and locating your farm’s next bottleneck. Financially this isn’t a big investment—$1,000 will buy a nice computer and software. But, learning to use it and analyzing records on a quarterly basis takes a big investment of time.”

GPS and related technologies

Herbel administers a program that provides management services to farmers. He’s seen a lot of investment in farm equipment that uses a global positioning system to help increase yield and reduce input costs. Most new equipment comes with this option, but you can buy add-ons for existing equipment.

Buying and repairing used equipment

“In almost all situations, repairing equipment costs less than purchasing new,” Herbel said. But first consider its age and condition. It’s easier to justify repairing if you can fix it yourself rather than hiring a mechanic. “The primary cost of repairs is the cost of the activity that’s not taking place—the crop not planted or the crop left standing in the field.” Developing an equipment investment plan can alleviate much of the stress of making purchasing decisions, he added.

New equipment

Oldvader puts it this way: “Repair if you can—buy if you must.” Many farmers purchased new equipment during the most recent upswing in profitability. Now, with sales down, “Attractive deals and interest rates may be available. Efficiency and technology enhancements could also justify new paint. Just don’t dry up the liquidity.” Although credit demand has declined overall, his association continues to finance a healthy number of new and used equipment purchases.

Financial planning

Herbel suggests that you invest in financial analysis and planning, whether you contribute strictly your own time or work with a consultant. “An operator needs to understand how you are using current assets and what you need to change to meet future goals,” he said. These are just a few investments that can save you time and money. Others might include a Smart phone to check markets and weather or an all-terrain vehicle to save time on the farm. Whatever you buy, Oldvader says, in today’s agricultural economy, “Producers should be taking a closer look at return on investment.”

Liquidity ratio tells you where to draw the line on debt

Before you borrow to fund your next investment, get out your pad and pencil—or computer—and figure out your current liquidity level. Bankers use several ratios to determine whether to lend to you, and the liquidity ratio ranks high on their list.

The liquidity ratio compares current assets or capital on hand to debt. Many farm lenders prefer a ratio of 1.25 to 1 or better. For every $1 of current liabilities, you should maintain $1.25 in liquid assets. If you owe $1 million in current liabilities, for example, you should maintain $1.25 million in current assets. Current assets include cash, crop or livestock inventories, accounts receivable and marketable securities such as CDs, stocks and bonds. Current liabilities include obligations due in the next 12 months.
 

Other financial standards to consider before investing include repayment ability, the debt to equity ratio, and return on equity.

More farmers using the web to find equipment

Mike Earley racked up a good year in 2008. Earley Tractor Co. experienced higher sales than in its 41-year history in Cameron, Mo. Much of the credit goes to increased farm profitability, but Earley also points to Internet sales, both through the company’s web site, www.earleytractor.com, and through www.ironsolutions.com, operated by IRON Solutions, Inc. in Fenton, Mo.

"Dad probably was selling in a 20- or 30-mile circle” before establishing a web presence, Earley said. “We’re selling all over the United States now. We’ve sold planters from two or three states away where they look on the web sit and mail us a check. A week later they send a truck to pick up the equipment."

Some producers cut cost on fertilizer In the past two years, it may be time to invest in maintenance fertility.

Beyond helping dealers, web sites help individual farmers upgrade and sell what they don’t need.

Earley expects sales to decline. “We’ll have to reduce our inventory a little bit,” he said. William Edwards, extension farm management specialist at Iowa State University, explains why. “Most farmers are hunkering down. They’re going to pay the bills and hang on this year.”

But, if you can’t wait until profitability improves, Edwards speculates that a lot of good used equipment should be on the market since many farmers traded in their old machinery for new when commodity prices peaked.

Web sites can help you find the best deal, he added. “Buying used equipment is a more efficient process than it used to be. You no longer have to waste your time traveling and calling around. Dealers are fewer and farther between, and it pays to do your research.”

Google “used farm equipment,” Edwards suggests, and you’ll find an abundance of sites where you can search by equipment type, brand, dealer or price. You can also limit the miles you’re willing to travel. Some sites list new equipment as well.

Lisa Bocklage, IRON Solutions director of marketing, says the company’s site offers listings from across North America. In 2004, it attracted 75,000 visitors a month, and today it brings in more than a quarter of a million. “Sellers who listed on our site reported nearly $3 billion of equipment sold in 2008,” Bocklage said.

According to Bocklage, new equipment sales dropped since 2008, but used sales remain strong. She cited the monthly newsletter, Ag Equipment Intelligence, which reported that in 2009, 60 percent of dealers were selling as much or more used equipment as in 2008, and 43 percent of farmers said they’ll look at used for their next equipment purchase.

“Even with the slow economy, farmers are still upgrading,” Bocklage said. “For example, four-wheel-drive tractors sales have stayed strong, while the market for two-wheel-drive tractors has softened.” Tractors, combines and round balers appear most frequently among more than 60,000 current listings.

Back in Cameron, Earley had to hire a person to take photos of equipment and keep the web sites up to date. “It’s more work, but it pays off,” he concluded. The sites also keep him in touch with other dealers so he can exchange trade-ins that don’t match the colors on his lot.