On Dealing with Prosperity
2004 is a great time to be in farming. Farm incomes were strong last year and prices are pushing record highs for nearly all Kentucky farm enterprises. But, let us not forget disappointing years like 2002, when Kentucky farm cash receipts were especially low.
Managing during prosperous times is really more difficult than managing when incomes are low and cash scarce. Why is that the case? Managing in prosperous times is tough because you don't have the constraints placed on you by your loan officer. It is just too easy to make impractical decisions. We must look at prosperous times as an opportunity to save and invest in the future of our farming enterprise and not a time to acquire luxuries. The temptation might be to buy a new pick-up when last year's model is working perfectly well. I am going to use buying a new pick-up as my example of a luxury purchase because that is what we always joke about with farmers when farm incomes are good, even though, in many instances, buying a new pick-up may well be the very best economic decision. I could just as easily use any other piece of new equipment, other "new paint" or any of the toys we big boys or girls like to buy for fun.
Naturally, we all deserve to splurge occasionally, but splurging should not be the automatic or default response. We should plan as carefully in prosperous times as we do when money is so tight we need to borrow excessively large amounts to keep things going.
Yes, last year was a good year and prices are pushing records this year. But with all this good price and income news, lower prices cannot be far behind. We all know about the swings in production cycle. In the 25 years from 1978 to 2002, for example, we have had as many years below the trend line for net cash receipts as we did above it. That is to say, we have had as many or more bad years as we have had good ones.
The key to weathering the storm in the bad year is to wisely invest and save when times are relatively good.
So what are the options? How do you proceed? I would suggest the following.
First, determine if there really is extra cash at your deposal. Ask yourself if you have surplus beyond what you need for operating the farm and household expenses. It would seem unwise to splurge if you have to turn around in a few months and ask for an especially large operating loan. On the other hand it could make perfect economic sense to invest in your farming enterprise to maintain or enhance capacity even if that meant having to borrow operating money later.
Once you have determined reasonable farm enterprise investment options you can compare them and their expected returns to investments in such non-farm alternatives as stocks, investment real-estate or mutual funds.
Finally you should compare expected returns of all these investment alternatives, farm and non-farm, against each other as well as the purchase of that new pick-up before deciding what to do.
In this way you will have a clear picture of the real cost of that pick-up. It isn't just the $25,000 you'll pay for the vehicle, but it's also the loss of expected income from those other alternatives that you can no longer pursue because the money went for the pick-up. If after all this analysis you decide to buy the pick-up you will have the comfort of mind of knowing that you have made a sound economic decision.
To learn more about dealing with prosperity contact The Agricultural Economics Department, an area UK Farm Analysis Program or your local County Extension Agent.
For More Information
For additional information, please contact Lynn Robbins.