Tips for Growers To Overcome Financial Challenges and Improve Profitability
August 7, 2023 Profitability depends on several variables that can be tough for farmers to manage. Not only do you have to contend with market uncertainties that affect operating and production costs, but many growers are facing extreme weather conditions, making these events that much more costly. You can’t influence a lot of these variables — like the timing of the next hurricane, disease pressure, or changes in interest rates — but proactive management of your money can go a long way to increase your chances of earning a profit.
To get started with a more proactive approach, take a look at your financial plan alongside your crop plan. Open a dialogue with your crop consultant and a financial expert to get more information on cost savings and productivity so your crop and your money are working for you. A lot of growers focus on what’s happening in the orchard and in the field, but don’t connect that to the financial health of their operation. With these partnerships and channels of communication open, you’ll have the best view of where you’re at, where you can go, and how to get there, which will translate to a bigger return.
Common challenges that stymie profitability
Produce growers are getting hit with increased operational costs. Market inflation continues to put pressure on input costs, adding to growers’ expenses. Compare those costs with recent commodity prices, which are not rising, and you’re going to have a gap in your profitability equation that will be hard to close without financial expertise.
The interest rate environment is also exacerbating expenses for growers. The Federal Reserve raised interest rates to a 22-year high in July, making is more expensive to borrow money. This puts pressure on growers to find economical ways to pay for the products they need. Working with a financial expert can help you navigate a complex market and find opportunities to save. This includes not only looking for the most attractive rate, but paying close attention to the terms and incentives of your loan, which in some cases may make what appears to be the lowest-rate option more expensive. For example, interest adds up depending on whether your rate accrues daily or monthly. Knowing how those details affect your bottom line and considering other benefits – like flexible repayment terms structured around your crop’s revenue cycle – can create substantial savings in the long run.
The weather also presents persistent challenges to growers looking to earn a profit. Environmental impacts can make a big difference in helping, or hurting the bottom line. For example, after Hurricane Ian, many growers in Florida have acres that are out of production. Cash flow becomes an issue if you don’t have a cushion built in to your financial plan to provide access to capital while you await Disaster Relief Funds.
One way to solve the cash flow crunch is to look at other options to provide that liquidity. Input lending can ease some of the financial stress growers feel without overextending a bank operating line. Paying for inputs with alternative funding sources frees up capital to invest in other priorities. For example, if a piece of real estate comes up for sale or lease – a rare opportunity in this market – you have flexibility to take advantage of this opportunity and maximize your operational return on investment. Similarly, input financing can free up cash for other financial necessities, including making payroll, fixing irrigation equipment, investing in technology to fight diseases and making other investments in your infrastructure.
Create more certainty and flexibility with financial planning
With so many financial headwinds to battle, growers have to use every tool in their belt and adapt to achieve a return on their investment. It costs more to produce a profitable crop in today’s market, even when you have quality and output on your side. To unlock the next level of profitability, you need financial flexibility to respond to market and weather conditions, and you also need to consider the most economical ways to manage costs. Financial planning can help reveal these insights and support better decision-making, where profits are concerned.
Here are some tips to consider as you build, or revisit your financial plan:
• Shop for a fixed interest rate to pay for input purchases, which helps create a bit more certainty for your budget.
• Get expert-level perspective on the interest rate environment. Working with partners can help you secure the most attractive terms and competitive rates to save on interest.
• Read the fine print. The market is full of opportunities for growers to save money, but you have to do the research and know where to look for those cost-saving incentives. Often you’ll save more if you secure terms that align with your cash flow.
• Look at seasonal offers and promotions, which tend to come with more attractive rates and flexibility to leverage your operating line of credit.
• Many growers manage multiple crop cycles throughout the year. Every time a crop plan shifts, which may happen frequently, it’s time to reevaluate and adjust your financial plan to protect profits.
Take uncertainty out of your profitability equation by working with your crop consultant and financial experts who can help firm up some variables that affect your ability to earn a return.
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