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Weathering the Drought

Six steps toward financial stability during and after a dry season

America's agricultural businesses are facing the worst drought since 1988. As farms work to salvage the remainder of the season and start purchasing inputs for 2013, there are widespread concerns about the financial impact Mother Nature will have on operations of all sizes.

Did you know there are ways to offset the financial hardships? Here are six steps you can take right now to protect your business today and in the future.

1. Contact your crop insurance agent
If you are expecting low yields or have damaged crops, your crop insurance agent can review your crop forecast, policy coverage, and their impact on your current situation. The agent can also give you an in-depth overview of the filing and payment process in the event you do need to file a claim. But, be sure to contact your agent as soon as possible. The USDA's Risk Management Agency notes that damage often must be given to an insurance provider within a certain specified period of time of discovering damaged crops or production losses.

2. Visit your agricultural banker
In times like these, many farmers worry about credit. An agricultural banker can recommend several short-term banking options to help out until you receive any potential crop insurance disbursements. Remember to invite a Certified Public Accountant (CPA) along for the meeting. Together, the three of you can discuss your current financial situation and plan for the rest of the growing year. Bring as much information as possible, including a status on current crop conditions and forecasted yields, as well as your crop insurance levels.

3. Take advantage of different options for accounts payables and receivables
Many tools are available to lengthen payment cycles. Paying bills online or using an automatic clearing house (ACH) allows you to set up payments for the day they are actually due--which means you can hold on to your cash as long as possible.

Online banking and ACH are also helpful for accounts receivables, whether for regular payments from the local elevator or a single payment from the insurance company. These electronic payments usually mean you get paid faster than waiting for a check to come in the mail. Remote deposit also is a good option. Check with your agricultural banker to see if it's available at your bank.

4. Seek alternative assistance
The USDA Farm Service Agency provides disaster assistance for drought losses through services like the Noninsured Crop Disaster Assistance Program (NAP), the Tree Assistance Program (TAP) and the Livestock Forage Disaster Assistance Program (LFP). Contact your local Farm Service Agency office to see if these or any other federal funding options are available in your area.

5. Map out annual working capital
Getting a firm grip on annual working capital--the amount of money needed each year to maintain a successful business--helps prepare farmers for the rainy and not-so-rainy days to come. Since every farmer and rancher operates differently, appropriate levels of working capital vary. Your agricultural banker and CPA can help you plan.

6. Chart a course for the future
Even if you are consumed with the current drought situation, it makes sense to start thinking about where your operation will be a few months--and a few years--from now. Thinking ahead can help prepare you for the next time weather puts a damper on your business.

Start by creating a cash-flow projection for at least the next 12 months, and then prepare a balance sheet of your assets and liabilities to determine equity in your property. Calculating your liquidity--how quickly your assets can be transferred into cash--can assist in determining if you need to refinance or sell any assets. Finally, developing a business plan can help you make deliberate decisions about your farm's future, and can ultimately be used to help you apply for a loan when you're ready.

To discuss these steps and learn about other ways to offset the financial impact of this year's drought, contact a PNC Ag Banker.

PNC is one of the FDIC's Top 20 agriculture banks* in the U.S., with branches in 19 states and the District of Columbia.


*As reported by the FDIC, based on aggregate loan volume