Rising input costs, a tight labour market and land price uncertainty are increasing the cost of operating a farm. Meanwhile, as BMO Senior Economist Aaron Goertzen noted in his most recent report, it’s getting more expensive to borrow money as a way to offset those costs. Factors like a weaker Canadian dollar and higher interest rates have delivered Canadian farmers an economic double whammy.

Of course, there have been periods of economic disruption before, and many farmers have weathered those previous storms. But every downturn is different, and improving on the playbook that you used in the past can help you get through this period of volatility and uncertainty.

One improvement is gaining in-depth knowledge of your financial situation. That includes where you’ve been, where you are and where you expect to be. It also requires complete transparency with all aspects of your financial situation. In the end, while the economic blip may be a short-term problem, you’ll be developing a strategy that will benefit your farm in the long term.

To understand where you are now, you need to examine where you’ve been. That’s why lenders look at historical financials when assessing your situation. Typically, you’ll want to calculate a three-year historical average, which will likely take both good and bad periods into account. Those numbers could include:

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  Fiscal year-end statements

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  Year-over-year comparisons

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  12-month cash flow projection

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  Input costs

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  Yields, historical and projected

Taking a hard look at your current situation will help you understand where potential pitfalls and opportunities may lie. That includes:

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  Understanding the structure and terms of your debt. Do all of your loans have the same maturity? With interest rates rising, are you “laddering” your loan maturities? That is, locking in rates of one-, three- and five-year maturity dates can help you manage interest rate risk. Having a balance of fixed- and floating-rate debt can also help you manage interest rate risk.

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  Knowing whether you have enough equity in your business. If you’re not building up equity and paying down debt, you may not be able to secure financing if you need another line for an opportunistic purchase.

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  Knowing your insurance coverage. Do you have the right crop insurance? Do you have business interruption insurance? What kind of coverage do you have for property damage? If one of your buildings burned down tomorrow, what would the insurance payout be?

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  Examining your forward contracts. Review the contract to ensure the price and quantity align with the direction of the business.

This exercise helps you answer a crucial question: how are you going to finance your farm’s future? In the short term, as you’re putting your crops in the ground, how will your working capital look over the next several months? Will you have enough working capital until fall or early winter when you start selling your crops?

Completing a 12-month cash flow projection will provide a better picture of whether you’re in a good position. It may be tempting to spend when you have the cash rather than having a strategy of when to spend and how to finance. We’ve seen some make purchases on items they didn’t need using their operating line simply because it was a good deal. If you have a 12-month cash flow projection in hand, you’ll understand how making that type of purchase could impact your ability to fund the essentials—like fuel—down the road.

It’s also a long-term exercise. Determining your capital expenditure budget for the next one to five years can help you understand how you need to adjust your current financial status. Will you need any major upgrades to equipment, land or buildings over the next few years? Knowing these types of long-term plans can help determine how you should structure any debt you plan to take on in the near term, as well as the potential equity you need to build up in your business.

Once you have a deeper understanding of your numbers, you can start to strategize around two key elements:

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  Operating facility. That is, how much working capital do you have (or have access to) to cover daily expenses throughout the year?

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  Capital expenditure facility. How much will you need to allocate for key purchases as you need them?

This process can seem overwhelming, which is why seeking the guidance of your key advisers can be a key benefit. You’ll need a strong finance team so you can get an accurate view of your historical and current numbers and what your projections are. If an in-house solution isn’t possible, you can look into working with an accounting firm that specializes in agriculture. Some firms will even contract out one of their employees to your operation. Along with understanding how your business operates, they also speak the same language as your banker, which will help when you need quick access for borrowing money.

And knowing what your lender needs is crucial, which is why you need to be completely transparent in presenting your financials. That means not withholding negative information because you think your lender won’t help. The fact is, you may not know what will help and what won’t. And if you’re not fully transparent, your lender will make decisions based on faulty assumptions.

Being completely open will help the lender guide you appropriately. You may have land that you don’t want to pledge for loan security, but disclosing that information could allow the lender to apply longer maturity dates to some of your debt to help boost your cash flow.

Full transparency means accounting for personal debt, as well. If you’ve co-signed a loan for a family member, for instance, that could have implications for your farm’s finances as well. The point is that you need to present the whole picture to make good decisions.

The discipline you gain from knowing your numbers can help improve your operation as well as how you look at your operation. It can also help position you for opportunities in a down market, such as an acquisition at a favourable price.

While this is an exercise to help you get through a potentially rough economic patch, it will still be beneficial to your operation when interest rates are falling, inflation is under control and the economy is booming again.

Erica Desjardins, National Lead, Structuring & Credit Risk, Agriculture & Agribusiness, Derek Briggs, Vice President & Team Lead, Atlantic Canada, Agriculture & Agribusiness, and Leah Weatherill, Head, National Agriculture contributed to this article.