Financial
Trends and Issues in Agriculture
By Sam Custer
OSU Extension, Darke County
Agriculture
industry
leaders have expressed their concern for the financial health of
farmers over the next few years. Are we looking at another period
similar to the early 1980’s? Most everyone agrees farmers are in
better financial health and have better debt to assets ratios than in
the eighties. However, that does not mean there won’t be
financial stress and some farms will not survive the financial
tightening that appears to be coming quickly.
Chris
Bruynis, Assistant
Professor & Extension Educator, The Ohio State University, has
attempted to address this issue in the following report.
Data from
the University of
Minnesota’s FINBIN Farm Financial Database was used to examine the
trend in financial positions of over 300 crop farms between 1,500 and
10,000 acres (average 2,500 acres) in the Midwest states of Ohio,
Wisconsin, Minnesota, Michigan, and Missouri from 2009 through 2012.
The data shows a nice upward trend in gross farm income and good
growth in net farm income from operations. Net farm income from
operations includes the change in inventory and prepaid expenses
adjustment to connect expenses and income to the calendar year the
production occurs.
Current
assets are those
assets that can be sold in the calendar year and turned into cash.
Included in these would be grain held, accounts payable, and prepaid
supplies in inventory. Current liabilities are those expenses
that the farmer is committed to pay in the next twelve months.
This includes items such as operating loans, accounts payable, loan
interest due this year and the current portion of term loans. As
farmers have increased their farm income and current assets, they
have also increased their current liabilities. Even with
increasing current liabilities, their working capital increased and
their liquidity position improved
Examining
farm solvency
shows a similar trend as liquidity. Solvency is the ability of a farm
business to pay all its debts if it were sold tomorrow. Farm assets
are up over $2 million while farm liabilities grew $630 thousand.
Farmers during the past four years have also improved their solvency
ratios as well. This all look promising. So why are
agricultural professional concerned?
The
concern centers around
the recent drop in crop prices and the predictions that crop prices
may average around $4 corn and $9 soybeans for the next three years.
If this occurs, farm income would return to 2009 levels ($3.77 corn
and $9.55 soybeans reported by the sample farms). Looking at the
chart above, farmers would have approximately $1.30 million in income
(2009) and $1.38 million in expenses (2012).
Will the
farm expenses fall
likewise? There could be some softening of farm inputs, but
intermediate and long term loan payments for land and equipment will
not change. Although some of the purchases were financed from
profits, the current liabilities on the balance sheet increased from
$585 million to $683 million. Also the renegotiation of land
rents downward will be slow to occur. In addition, farmers have
increased their personal living expenses on the average from $68
thousand to $88 thousand annually in the past four years.
This sets
the stage for
farmers to potentially lose $150 thousand or more annually for the
next few years. So is this problematic? In this sample,
the average farm can withstand this because of a healthy working
capital balance of $1.16 million. But what about the farmers that
have borrowed excessively to purchase new equipment and tile in order
utilize accelerated depreciation as a tax management strategy? Or the
farmer who has purchased additional land at high market prices?
Or the farmer who has aggressively rented land for top of the market
prices and rented land is 90% of their operation? Some farms
businesses may be at significant risk of financial problems.
Farmer’s
should be
examining their working capital and overall financial position now to
prepare for the possible financial belt tightening that could occur
in the next few years. Because of delaying crop income to the
next year, farmers who primarily manage taxes and not overall
finances will not realize the impact on their financial position
until 2014 or 2015, which may be too late to take corrective action.
For more
information, visit
the Darke County OSU Extension web site at www.darke.osu.edu,
the OSU Extension Darke County Facebook page or contact Sam Custer,
at 937.548.5215.
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