May 28, 2022

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Agriculture Forum: Is your 2020 in the books? | Business

Looking over the past year, 2020 certainly brought many challenges to us, including those of us involved in agriculture. Farmers experienced dramatic volatility in both market prices and market availability. In response the federal government passed several bills that added significant financial support to farmers, and also created additional uncertainty as farmers struggled to understand and comply with program requirements.

This increased uncertainty, labor shortages during the pandemic, and the demands of producing food despite the restrictions placed on them, has certainly put a strain on Michigan farmers.

The stress factors are many, but certainly two of the major implications have been both financial and mental stress.

I’ve spent the last several weeks working with northern Michigan farmers to look back at their 2020 financial records and provide them with an analysis of their financial performance. Most of these farmers are part of a program at MSU called TelFarm. The TelFarm system of farm financial record keeping is a program available from MSU Extension’s Farm Business Management Educators. It is an educational service program designed to assist farmers with their farm financial records and decision making.

So how do we truly get a picture of a farm’s financial performance? First, there is no one measurement that tells us everything we need to know. Cash flow is probably the most familiar measurement. We “feel” our cash flow situation in our checkbook/savings. We know when things are tight and when it feels like we have extra cash to catch up on some things. Cash flow simply recognizes all of the cash that has flowed in and out of the business. It is important, as it impacts our ability to pay all cash expenses and loan payments — but it also has limitations.

In a cash accounting system, we need to adjust this cash flow (also called “accrualizing” the cash flow) to attribute both the income and expenses to the year in which they were generated. For example, a farmer may have corn that he produced in 2019 that wasn’t sold until 2020. Though that income helped him/her pay bills in 2020, it actually belongs in the 2019 farm analysis. Net Farm Income takes into account this accrualizing of income and expenses, adjusting for changes in inventory (quantities and values) and also adjusting for accounts receivable/payable, and depreciation. Net Farm Income gives us a picture of the “profitability” of the farm.

In order to get a true picture of a farm’s financial performance we need several items: Beginning and Ending Balance Sheets (with complete inventories, accounts receivables/payables, and details of all farm loans), and a bank reconciled statement of Cash Flows (Cash Income Statement). Accuracy in these records gives us confidence in the farm financial analysis that we generate. From this analysis we also generate a number of key financial performance measures that farmers can use to compare themselves to industry standards.

So, what has the impact of 2020 been on farm profitability?

A few of the big takeaways are the significance of federal aid, the mental stress placed on farmers, and the significant variation in net farm income and other profitability measures. This variation in profitability has a silver lining, it means that there is room for improvement and that improvement is possible.

Could your farm benefit from some additional supports?

Through the MDARD/FRSAN Legacy of the Land grants, MSU Extension can help support you and your farm to help you stay or get back on a successful track. Supports include both financial supports as well as mental health supports.

Through these grants we are able to provide a limited number of subsidized enrollments in the Michigan State University’s TelFarm program. The TelFarm program provides accounting and financial analysis support to farmers across the state of Michigan. We help take your farm records to the next level. This program provides assistance in bookkeeping in both PCMars and QuickBooks Desktop, as well as farm financial analysis and yearly check-in service including tax planning strategies.

MSU Extension’s team of Farm Business Management educators also work with farms in analyzing business management strategies.

For more information on help offered through the MDARD/FRSAN Legacy of the Land grants, check out our webpage at: https://www.canr.msu.edu/resources/legacy-of-the-land. You can also reach out to me at 231-533-8818 or [email protected]

This work is supported by the Michigan Department of Agriculture & Rural Development [grant # 00501937] by authority under Act No. 65 of the Public Acts of 2019; and the Department of Agriculture (USDA) National Institute of Food and Agriculture (NIFA), North Central Farm and Ranch Stress Assistance Center [grant # 2020-70028-32728].

Stan Moore is a Michigan State University Extension Farm Business Management Educator.