Can your farm survive a downturn? How to stress-test cash flow before margins get tighter

Fertilizer can be booked now. The combine may need to be replaced. Grain prices leave little margin for error. Each decision may be manageable on its own, but what happens if several pressures hit at once?

That is the question cash flow stress testing is designed to answer. By modeling a few realistic setbacks together, farmers can see where the operation begins to strain—and decide what to adjust before tighter margins force the issue.

Test the assumptions that matter most

A base cash flow projection reflects expected conditions. Stress testing changes the assumptions carrying the most risk to show how much room the plan has to absorb unexpected conditions.

“Stress testing cash flow is critical when commodity prices and major expenses can change quickly,” said Thomas Eatherly, farm financial business adviser at Pinion.

Shifts in fuel and fertilizer costs, yields, repairs, equipment needs, or acres farmed, can quickly reshape a farm’s financial outlook.

A farm can start with the cash flow projection already prepared for planning and lender discussions, then adjust the variables most likely to affect the operation.

For a crop operation, those variables may include commodity prices, yields, fertilizer, fuel, and seed costs, along with interest expense. One scenario might test a 10% decline in grain prices. Another could pair softer prices with higher operating costs or borrowing expenses.

Eatherly recommends using reliable numbers to build best-, average-, and worst-case scenarios for this year and next.

“A profitable year does not guarantee the next one will be profitable,” he said.

Some risk can be managed by locking in fertilizer prices, using crop hedges or cash contracts, and timing major equipment purchases to fit cash flow.

Comparing each scenario with the base projection can show whether the operation has enough working capital and liquidity to absorb a setback. It can also reveal where a change in expenses, financing, or marketing may be needed before margins tighten further.

The same principles apply to cattle operations, but the assumptions look different. Cattle prices, feed costs, weather, and pasture or hay availability can affect revenue and expenses at the same time.

“Cattle operations have risk coming from both sides of the cash flow,” said Sam Sterling, ag business adviser at Pinion. “You can have strong cattle prices and still find yourself under pressure if drought limits grazing and feed costs climb. The stress test needs to account for what happens when those pressures hit at the same time.”

A focused scenario that combines the operation’s most consequential risks is often the most useful.

“I would start with a drought scenario that assumes less available pasture, higher feed costs, and an earlier decision about herd size,” Sterling said. “Then pair that with a softer cattle price. If the operation can work through that combination, you have a much clearer picture of how much flexibility you really have.”

The right scenario will vary by operation. A cow-calf business with ample forage may test a price decline, while one already purchasing feed may focus on the effect of further cost increases. The value comes from using conditions that reflect the business rather than applying a generic percentage across every category.

When pressures compound

The most useful stress tests combine pressures rather than examining each one in isolation.

Testing those combined pressures shows not only whether cash flow turns negative, but when. That timing matters. A shortfall early in the production cycle may require a different response than one near harvest or sale time.

The exercise can also improve conversations with lenders and advisers. Instead of discussing risk in general terms, farmers can show how specific changes affect debt service, working capital, and the amount of operating credit the business may need.

Turn the results into action

Finding a weakness is only the first step. The next question is whether the operation has enough flexibility to absorb the exposure or whether action is warranted.

When a stress test reveals a weak spot, Darin VanVactor, adviser at Pinion Risk Management, recommends asking what caused it and what it will take to correct it. Peers, board members, and trusted advisors can help validate the numbers and shape a practical response. Taking that plan to a lender shows the producer understands the risk and is prepared to act.

“The results should point you toward the risk-management tools that address the operation’s greatest exposure,” VanVactor said. “If the stress test shows a price decline creates the biggest strain, review your marketing and revenue protection. If rising costs are the problem, focus on purchasing decisions and cost controls. The plan should respond to what the numbers are telling you.”

Risk protection also carries a cost, so the objective is not to guard against every possible outcome. Stress testing helps identify exposures that would materially affect cash flow and allows the farm to compare the cost of protection with the potential financial loss.

“When the downside scenario uses up the operation’s working capital or creates a financing gap, that is a sign to act,” VanVactor said. “The first decision is whether you can reduce the exposure within the business or whether you need to bring in your lender or another advisor. Those conversations are much easier before the pressure becomes an immediate cash flow problem.”

From scenario to decision

By showing which changes an operation can withstand and which require a response, stress testing turns a cash flow projection into a more useful planning tool. Farmers do not need certainty to prepare, but they do need a clear view of their exposure—and time to act while options remain.

Editor’s note: Keaton Dugan, a certified public accountant, advises farmers and agribusiness owners on strategic tax planning, succession strategies, and long-term financial sustainability. Whether the goal is to expand operations, transition ownership, or optimize tax structures, Dugan draws on his experience as a trusted adviser and his background working on his family’s multi-generational farm to deliver practical, tailored solutions. Contact him at [email protected].