As renewal season continues here at AgCountry Farm Credit Services, we have seen that 2021 turned out to be a profitable year for most of our service area. Borrowers are showing an increase of working capital and earned equity that we haven’t seen in a few years, which is a good thing.
As borrowers look to make capital purchases, there is a delicate balance between using cash and debt. It is important to keep in mind that, while we can take advantage of increased commodity prices right now, that may not last. It is crucial to remember this when increasing term debt in “good times.” Higher debt levels may be a challenge when, not if, commodity prices decline.
One way to keep this balance is to use excess cash as a down payment on purchases to keep the debt level appropriate. An appropriate debt level differs between every operation. In terms of excess cash, a goal to strive for is maintaining enough working capital (current assets minus current liabilities) to cover one-third of your farm expenses.
However, the one-third goal may be getting closer to one-half. We have seen an amplified volatility in the world economy over the last two years, affecting input and machinery pricing and availability. Some inputs are requiring payment earlier to secure the product while others are requiring commitment over a year in advance to guarantee production. This puts increased importance on maintaining working capital – to have the excess cash allowing for the ability to lock in inputs and early discounts for your operation.
If you have excess cash and are wondering what to do with it, there are many options to consider. You could pay down on existing term debt or it may be wiser to save that cash for a down payment on an upcoming purchase. In the increasing rate environment we are now experiencing, cash down on purchases will save interest expense.
Speak with your AgCountry loan officer to find out what may best suit your situation. We can provide options on how varying levels of cash vs. debt will affect your farm’s financials and assist you on making the best decision for your operation’s financial position.
