Pennsylvania has a robust cash crop industry — from corn, soybeans and alfalfa to more niche products like produce, tobacco and hemp. While cash crops can prove to be relatively resilient, they can come with their own risks that could have a drastic impact on growers’ financial welfare. 2020 has proved to be a challenging year for many within the agriculture industry, so it is especially important for farmers thinking about the cash crop sector to consider three key factors that could impact their success.
Know the market. Perhaps the most important factor for farmers to consider is who will buy their crop and what the market climate is for their cash crop of choice. One of the biggest mistakes a farmer can make is growing a cash crop and hoping it will sell as opposed to doing the research into demand prior to diving into a particular market. For example, since Pennsylvania’s hemp industry opened in 2017, many farmers jumped at the opportunity for large profits but failed to consider if there was a market for the product or if processors were ready to handle high volumes of hemp crop. Many farmers saw much lower profits than anticipated, and an overabundance of hemp continues to sit in storage. While there is huge potential in the region’s hemp industry, both the market and processing capacity need to be further developed. It is important for growers to consider whether the industry they want to enter is developed enough for them to make a living.
Know the risks. The coronavirus pandemic has impacted the livestock industries like pork, beef and dairy. Fortunately, cash crops haven’t suffered the same fate and some crops, like produce, have actually done relatively well this year due to a higher need for locally accessible products. However, there are still risks to consider around cash crops. In particular, produce and tobacco are very susceptible to weather. While tobacco is relatively drought tolerant, it is extremely vulnerable to heavy thunderstorms and hail, which can wipe out an entire crop in one storm. A large part of farming involves understanding risks to financial stability and taking steps to protect assets and operations from the impact of dramatic weather or economic events.
Know how to guard against volatility. A common industry phrase we stand behind is, “cash is king.” If farmers have cash on hand, they’re going to be ahead of their competitors in the industry and they will have a better chance of protecting their assets. It may be tempting to utilize extra funds to pay down existing debt, but it’s important to set aside a portion of surplus cash to keep on hand as emergency funds. Another tactic Some farmers rely on is hedging or forward contracting their commodities on the futures markets for protection. In addition, farmers need to have lines of credit and cash cushions to protect themselves from volatility in demand and in the economy. Just as crops may fall victim to bad thunderstorms, farmers should set themselves up to weather bad financial storms.
2020 has been a difficult year for some sectors of the agriculture industry and relatively successful for others. No matter the economic situation, farmers interested in cash crops need to take steps to ensure they are insulated from risk and volatility while also understanding the potential of the market they are entering. Reach out to the agricultural lending team at Univest to learn more about how we can help you set up a successful cash crop operation and grow a strong financial foundation. Contact us to start a conversation.
Univest Bank and Trust Co. is an Equal Opportunity and SBA Preferred Lender.