After an unexpectedly good season, a farmer might be faced with a conundrum: Where to put those profits — back into the farm or into some other investment?
It’s a good problem to have, to be sure, but it’s not without its challenges.
“Farmers are really good about putting their funds into the farm side, not as much into retirement and non-retirement issues,” said Paul Neiffer, a principal certified public accountant in agribusiness at CliftonLarsonAllen LLP in Yakima, Washington.
He compares the three investment options to the three legs of a stool that must be kept in balance.
“I definitely think having some additional assets outside of the farm makes sense because our farm clients often have all their net worth tied up in the farm,” Neiffer said. “If you siphon some of that off (to other investments), it can help smooth things out when the cycle turns if farming goes down, giving them the liquidity they might need for the farm.”
It starts with looking at a farm’s balance sheet and making sure there is enough on the “current assets” side.
“For a farmer who has bought a lot of equipment with cash and land with cash, that liquidity might not be where it should,” he added. “It might make sense to refinance some equipment and land with lower interest rates.”
He stressed the importance of having a strategic plan covering the next three to five years so you know what your goals are and how to adapt to changes in the industry.
David Buck, the partner in charge of agribusiness services at AKT in Salem, agrees.
“(Making decisions) is best done in the context of a plan and goals that a farmer sits down and thinks about,” he said. “It’s a lot easier if it’s in the context of these goals.”
He recommends a farmer with some unexpected profits first look at debt structures and to pay some of that down if it’s an issue.
“When retirement is looming you want to have the debt under control,” he said. “If debt is under control, a lot of farmers see land as their primary source of retirement since land has always been a great long-term investment and an inflation hedge.”
Then, for farmers with excess cash flow who don’t have land they want to purchase, he suggests some sort of a qualified retirement fund such as an IRA.
The land issue changes if a farmer is planning to pass the farm along to the next generation.
“If you aren’t planning on selling your land or if you are leasing, you have to look at a long-term plan to set money aside,” Buck said. “There are some good tax-favored vehicles for this purpose.
“The tax law encourages individual retirement savings, and farmers can tap into that just like any business entity.”
Neiffer agreed, pointing out that “with retirement, the younger you start, the power of compounding becomes very powerful.”
Buck reiterated that it all goes back to a plan that should be created long before retirement is looming.
“It’s not that difficult to sit down with someone who is more of a numbers person who can look at a 10-, 15-, 20-year approach,” Buck said. “A good planner is going to be able to factor in things like health needs, Social Security components, and so on.”
Neiffer added that investment diversification is not the only thing to keep in mind, that risk diversification and making sure a farm’s structure is properly set up are also key.
Beyond that, he said, farmers can be pretty conservative on the investment side, with, say, a mix of bonds or fixed income equities.
“I’m fine with farmers being fairly conservative with non-farm investments and fairly aggressive on the farm side because being a little more aggressive over a 10-, 20-, 30-, 40-year period, it always pays off,” Neiffer said. “Equities have always outperformed bonds in that time period, and a farm operation is already an equity component.”
If a farmer is faced with excess cash flow, Buck said, “the main thing is to do something productive with that influx. If you have an influx of funds, take them off the table and put them to work for you.”