Traditionally, December and January are a time to reflect on the past year and think about the one ahead. For producers, this often means turning attention to paperwork and office duties that may have been building up over the busy fall months. While most of us have no shortage of items on our to-do lists, one that may rise to the top is financial planning for your farm operation.
Financial planning and risk management are critical elements to the success of any operation. Thinking of it as a “three-legged” stool can be useful, with production planning, financial planning and risk management making up the three legs. Each leg of the stool is necessary to create a strong structure.
- Production planning – the number of acres to seed, livestock purchases and sales, input purchases and human resource planning,
- Financial planning – farm transition, input financing, capital expenditure decisions, interest rate management and savings plans,
- Risk management – operational diversification (crop mix, livestock strategies, and geography), insurance for crop and livestock production loss, forward-delivery contracts and hedging strategies.
While this list isn’t all encompassing, you can quickly see just how complex it can be to run a successful farm enterprise. By organizing these topics into the three-legged stool categories, you can begin to work through each task. Being well informed is always important, and that often means understanding our limitations and seeking advice when we need it. Farming can be a 24/7 endeavour and it’s impossible to be an expert in every aspect of business – there just aren’t enough hours in the day.
Partnering with experts can help you ensure the success of your operation. Whether it’s working with an accountant who understands agriculture and tax planning—including your lender in your financial planning process—or having a host of advisors in areas like animal health, agronomy or risk products— these supports can pay dividends in the long run.
A second key topic to watch is how your operation’s debt is structured, which ties into your overall risk management plan as well. For instance, having all of your debt on variable rates could expose your operation to interest costs that your business cannot afford.
Conversely, if you lock in all of your debt for the same term, you may miss the opportunity to lower your overall interest costs. Having a mix of fixed and variable rate financing can be beneficial. This past year has been particularly challenging for managing interest rates.
AFSC, like most lenders, offers programs that provide flexibility in how you can manage your debt. We offer terms from five, 10, 15 and 20 years, and one and three year terms on revolving loans. If you have operating credit that is on a variable rate, then locking in some or all of your operating and capital expenditure loans may mitigate your financial risk.
If you are a beginning producer, or someone looking to take over the family farm, AFSC’s Next Generation Loan program ties in very favorably with most financial plans. With a Young Producer incentive rate, you can reduce your overall borrowing costs for the first five years of your borrowing, while the flexibility on terms allows you to manage the risk and maturity of your debt.
In addition, AFSC’s revolving loan program is a fixed rate product. If you are concerned about the financial exposure on a fully variable rate financing line, then having a portion of your operating credit locked in can also reduce your risk and give you certainty.
There’s so much to consider when running your farm operation, and it requires you to wear many hats. A little planning now will put you and your farm on the right track. AFSC’s knowledge and understanding of the challenges in farm planning, risk mitigation and financing can help you get there.
If you have questions or would like to learn more about AFSC’s lending options, please contact one of our lending relationship managers. Use Live Chat on our website or AFSC Connect, call our Client Care Centre at 1.877.899.2372, or contact your preferred branch office.
Kevin Chanut, AFSC Vice President Lending
BA Agricultural Economics, MBA