Expect Farm Liquidity to Decline in 2021

 

by: Chris Zoller, Extension Educator, ANR, Tuscarawas County

Liquidity is the ability of a farm business to quickly convert current assets to cash to pay short-term (less than 12 months) cash obligations, debt, family living, and taxes. It is one of several measures used to gauge farm financial performance over time. The United States Department of Agriculture Economic Research Service (USDA-ERS) is forecasting a decline in farm sector liquidity in 2021.  This article will discuss working capital, current ratio, and times interest earned ratio financial measures.

Working Capital

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USDA Agricultural Projections to 2030

Source: Chris Zoller, Extension Educator, ANR, Tuscarawas County

Click here for PDF version–easier to view Figures

The United States Department of Agriculture (USDA) recently released the interagency report: USDA Agricultural Projections to 2030.  These long-term projections include several assumptions related to the Farm Bill, macroeconomic conditions, farm policy, and trade agreements.  While long-term projections are based on assumptions and many unknowns, they do provide a glimpse of how U.S. farm commodity prices may perform over the next several years.  Anyone interested in reading specific details is encouraged to see the report available here: https://www.ers.usda.gov/webdocs/outlooks/100526/oce-2021-1.pdf?v=3513.2.

This article briefly summarizes selected selections of the 102-page report, including U.S. crop prices, milk production, U.S. farm income, and government payments.  Figures from the report are included to accompany the text.

U.S. Crop Prices

Rising global demand for diversified diets and protein will continue to stimulate import demand for grains. Increased demand for these crops is accompanied by rising competition for market share from countries such as Brazil, Argentina, the EU, and the Black Sea region. The United States also faces challenges related to ongoing tensions with trade partners and a relatively strong U.S. dollar. Although strong trade competition continues, U.S. commodities remain generally competitive in global agricultural markets, with U.S. corn and soybean exports projected at record highs by 2030/31. Nominal prices for wheat, cotton, and rice are expected to rise modestly between 2021/22 and 2030/31.

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Farm Office Live Continues!

Source: Barry Ward, David Marrison, Peggy Hall, Dianne Shoemaker – Ohio State University Extension

“Farm Office Live” continues this winter as an opportunity for you to get the latest outlook and updates on ag law, farm management, ag economics, farm business analysis and other related issues from faculty and educators with the College of Food, Agricultural and Environmental Sciences at The Ohio State University.

Each Farm Office Live begins with presentations on select ag law and farm management topics from our specialists followed by open discussions and a Q&A session. Viewers can attend “Farm Office Live” online each month on Wednesday evening or Friday morning, or can catch a recording of each program.

The full slate of offerings remaining for this winter are:

  • March 10th 7:00 – 8:30 pm
  • March 12th 10:00 – 11:30 am
  • April 7th 7:00 – 8:30 pm
  • April 9th 10:00 – 11:30 am

Topics to be addressed in March include:

  • Coronavirus Food Assistance Program (CFAP)
  • Proposed Stimulus Legislation
  • General Legislative Update
  • Ohio Farm Business Analysis – A Look at Crops
  • Crop Budget & Rental Rates

To register or view past recordings, visit https://go.osu.edu/farmofficelive

For more information or to submit a topic for discussion, email Julie Strawser at strawser.35@osu.edu or call the farm office at 614-292-2433. We look forward to you joining us!

Corn, Soybean and Wheat Enterprise Budgets – Projected Returns for 2021 Increasing Fertilizer Prices May Force Tough Decisions

Source: Barry Ward, John Barker, OSU Extension

The profit margin outlook for corn, soybeans and wheat is relatively positive as planting season approaches. Prices of all three of our main commodity crops have moved higher since last summer and forward prices for this fall are currently at levels high enough to project positive returns for 2021 crop production. Recent increases in fertilizer prices have negatively affected projected returns. Higher crop insurance costs as well as moderately higher energy costs relative to last year will also add to overall costs for 2021.

Production costs for Ohio field crops are forecast to be modestly higher compared to last year with higher fertilizer, fuel and crop insurance expenses. Variable costs for corn in Ohio for 2021 are projected to range from $386 to $470 per acre depending on land productivity. Variable costs for 2021 Ohio soybeans are projected to range from $216 to $242 per acre. Wheat variable expenses for 2021 are projected to range from $166 to $198 per acre.

Returns (excluding government payments) will likely be higher for many producers depending on price movement throughout the rest of the growing year. Grain prices currently used as assumptions in the 2021 crop enterprise budgets are $4.30/bushel for corn, $11.55/bushel for soybeans and $6.25/bushel for wheat. Projected returns above variable costs (contribution margin) range from $216 to $434 per acre for corn and $284 to $509 per acre for soybeans. Projected returns above variable costs for wheat range from $193 to $342 per acre. As a reminder, fixed costs (overhead) must be paid from these returns above variable costs. Fixed costs include machinery ownership costs, land costs including rent and payment for owner operator labor and management including other unpaid family labor.

Fertilizer prices continue to increase.  If you have not checked fertilizer prices lately, be prepared for some sticker shock. Producers with some fertilizer purchased and stored or pre-priced prior to recent price increases will likely see a healthier bottom line this upcoming crop year.

Those with little or no fertilizer pre-purchased and stored or pre-priced may want to consider using P and K buildup to furnish crop needs this year in anticipation of possibly lower prices in the future.  Now may be a good time review your fertilizer plans as you are considering how to best utilize your financial resources in 2021.

  • Use realistic yield goals.  Yield goals vary by field.  Each field has unique characteristics that can impact yield.
  • Utilize crop removal rates to determine crop nutrient needs.  Crop removal rates can be found in the new Tri-State Fertilizer Recommendations for Corn, Soybeans, Wheat, and Alfalfa (Tables 15 and 16), available at your local Extension Office.
  • Start with a recent soil test.  If your soil test levels are in the maintenance range or higher, 2021 may be a good year to “borrow” from your soil nutrient bank.

As an example, a 150-bushel corn crop will remove about 55 pounds of P2O5 per acre in the harvested grain.  This would result in a reduction in the soil test level of approximately 3 ppm.

Current budget analyses indicates favorable returns for soybeans compared to corn but crop price change and harvest yields may change this outcome. These projections are based on OSU Extension Ohio Crop Enterprise Budgets. Newly updated Enterprise Budgets for 2021 have been completed and posted to the Farm Office website: https://farmoffice.osu.edu/farm-mgt-tools/farm-budgets

 

Considerations of a Flexible Lease Arrangement

Source: Chris Zoller, Barry Ward, Mike Estadt, OSU Extension

Thousands of Ohio crop acres are rented from landowners by farmers.  While the most common is likely a cash agreement, the flexible lease may be worthy of consideration for some farmers.  This article will provide a broad overview of the flexible lease option, including advantages, disadvantages, and strucutre.

The information provided here is only a summary from the Fixed and Flexible Cash Rental Arrangements for Your Farm published by the North Central Extension Farm Management Committee.  Anyone interested in learning more about flexible leasing arrangements is encouraged to read more about this topic at this site: https://aglease101.org/wp-content/uploads/2020/10/NCFMEC-01.pdf.

What is a Flexible Lease?

Because of uncertainties with prices, yields, and input costs, some farmers and landowners are apprehensive about entering into a fixed long-term cash rental arrangement.  From the perspective of the farmer, the concerns include poor yields, commodity price declines, or sharp increases to input prices might impact cash flow if there is a long-term fixed arrangement.  In times like we are experiencing now, landowners want to capitalize on high commodity prices or high yields.

Therefore, the operator and landowner may turn to the use of a flexible cash rent of one kind or another. The idea of a flexible cash rent usually pertains only to the rent charged for cropland.

Advantage of Flexible Leases

  • Flexible cash rent enables the landowner to share in the additional income that results from unexpected increases in the prices of crops considered in the rent-adjustment clause. If the cash rent also is flexed for changes in yields, the landowner will benefit from above-normal yields regardless of the cause.
  • For the operator, risk is reduced. Cash-rent expense is lower if crop prices or yields are less than normal.
  • Calculating flexible cash rent requires more communication from both parties.

Disadvantages of Flexible Leases

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Ohio Farm Custom Rates 2020

Farming is a complex business and many Ohio farmers utilize outside assistance for specific farm-related work. This option is appealing for tasks requiring specialized equipment or technical expertise. Often, having someone else with specialized tools perform a task is more cost effective and saves time. Farm work completed by others is often referred to as “custom farm work” or more simply, “custom work”. A “custom rate” is the amount agreed upon by both parties to be paid by the custom work customer to the custom work provider.

Ohio Farm Custom Rates 2020 reports custom rates based on a statewide survey of 377 farmers, custom operators, farm managers, and landowners conducted in 2020. These rates, except where noted, include the implement and tractor if required, all variable machinery costs such as fuel, oil, lube, twine, etc., and the labor for the operation.

Some custom rates published in this study vary widely, possibly influenced by:

  • Type or size of equipment used (e.g. 20-shank chisel plow versus a 9-shank)
  • Size and shape of fields,
  • Condition of the crop (for harvesting operations)
  • Skill level of labor
  • Amount of labor needed in relation to the equipment capabilities
  • Cost margin differences for full-time custom operators compared to farmers supplementing current income

Some custom rates reflect discounted rates as the parties involved have family relationships or are strengthening a relationship to help secure the custom farmed land in a cash or other rental agreement. Some providers charge differently because they are simply attempting to spread their fixed costs over more acreage to decrease fixed costs per acre and are willing to forgo complete cost recovery.

The complete “Ohio Farm Custom Rates 2020” is available online at the Farm Office website here

 

Source: https://farmoffice.osu.edu/farm-mgt-tools/custom-rates-and-machinery-costs

 

U.S. Farm Liquidity Measures Projected to Decline in 2020

By: Chris Zoller, OSU Extension

Liquidity is a measure of the ability of a farm to use cash or ability to convert assets to cash quickly to meet short-term (less than 12 months) liabilities when due.  Data from the United States Department of Agriculture Economic Research Service (USDA-ERS) forecast a continued decline in 2020 of liquidity on U.S. farms.  This article discusses two metrics, the current ratio and working capital, to evaluate liquidity.

Click here for Article (access the figures)

Working Capital

USDA-ERS projects farm working capital to decline from the 2012 level of more than $160 billion to $52 billion in 2020 (see Chart 1).  Working capital is the value of cash and short-term assets that can easily be converted to cash minus amounts due to creditors within 12 months.  These are considered “short-term” assets and liabilities.  Having adequate working capital is important for a farm to meet obligations as they come due, take advantage of pre-pay discounts, and manage through price declines or unexpected expenses.

Like many things in agriculture, knowing how much working capital a farm needs varies based on several factors.  These include farm size, farm type, and market volatility.  The working capital to gross revenue ratio is a measurement of the working capital divided by the gross sales of the business. This ratio measures the amount of working capital compared to the size of the business.  Lenders prefer a working capital to gross revenues ratio of 40 percent or better. This means that if the business has $1 million in gross sales, working capital would need to be $400,000 or 40 percent of $1M.  When the working capital ratio falls below .20, a farm may have difficulty meeting cash obligations .in a timely manner.

Chart 1. (Source: USDA-ERS, February 5, 2020) (see PDF version to access charts)

Current Ratio

The current ratio is calculated as total current assets divided by total current debt (or liabilities).  Current is defined as less than 12 months.  Current assets include: cash, accounts receivable, fertilizer and supplies, investment in growing crops, crops held for storage and feed, and market livestock.  Current liabilities include: accounts payable/accrued expenses, income and social security taxes payable, current portion of deferred taxes, current loans due within one year, current portion of term debt, and accrued interest.

USDA-ERS expects the value of current assets to decline 3.5% and current liabilities to increase 2.3% in 2020.  The current ratio of U.S. agriculture was 2.87 in 2012 and is projected by USDA-ERS to fall to 1.42 in 2020 (see Chart 2).  If a farm has $100,000 in current assets and $70,000 in current liabilities, the current ratio equals 1.42.  A current ratio of 2:1 or greater is desirable and indicates a farm has $2 in short-term assets for every $1 in short-term debt.

Chart 2.  (Source: USDA-ERS, February 5, 2020)  (see PDF version to access charts)

Management Tips

Farm financial management is critical in today’s volatile environment.  Consider the following management tips:

  • Complete an annual balance sheet. Using your numbers, calculate trends.
  • Compare your numbers with recommended benchmark values.
  • Discuss your numbers with your lender.
  • Contact your local Extension educator or enroll in the Ohio State University Extension Farm Business Analysis and Benchmarking Program (https://farmprofitability.osu.edu/).

Sign up for USDA-CFAP Direct Support to Begin May 26, 2020

Ben Brown, Peggy Kirk Hall, David Marrison, Dianne Shoemaker and Barry Ward – The Ohio State University

Since the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020 and the announcement of the Coronavirus Food Assistance Program (CFAP) on April 17, 2020, producers in Ohio and across the country have been anxiously awaiting additional details on how the Coronavirus Food Assistance Program (CFAP) will provide financial assistance for losses experienced as a result of lost demand, short-term oversupply and shipping pattern disruptions caused by COVID-19.

The additional details on CFAP eligibility, payment limitations, payment rates, and enrollment timeline arrived on May 19, 2020, when the USDA issued its Final Rule for CFAP.  In this article, we explain the Final Rule in this issue of News from the Farm Office.

Click here to read the complete article

Starting Tuesday, May 26, 2020, producers can contact their local FSA office and begin to sign up for CFAP.  This bulletin serves as the authors’ interpretations of the Final Rule released by USDA, and FSA interpretation may be different.

OSU Extension and Ohio FSA will conduct a webinar in the upcoming days to outline program materials and answer questions. For information about the webinar and additional information on CFAP, please visit farmoffice.osu.edu.

Ohio Corn, Soybean and Wheat Enterprise Budgets – Projected Returns for 2020

Source: Barry Ward, Leader, Production Business Management, OSU Extension

COVID-19 has created an unusual situation that has negatively affected crop prices and lowered certain crop input costs. Many inputs for the 2020 production year were purchased or the prices/costs were locked in prior to the spread of this novel coronavirus. Some costs have been recently affected or may yet be affected. Lower fuel costs may allow for lower costs for some compared to what current budgets indicate.

Production costs for Ohio field crops are forecast to be largely unchanged from last year with lower fertilizer expenses offset by slight increases in some other costs. Variable costs for corn in Ohio for 2020 are projected to range from $359 to $452 per acre depending on land productivity. Variable costs for 2020 Ohio soybeans are projected to range from $201 to $223 per acre. Wheat variable expenses for 2020 are projected to range from $162 to $198 per acre.

Returns will likely be low to negative for many producers depending on price movement throughout the rest of the year. Grain prices used as assumptions in the 2020 crop enterprise budgets are $3.20/bushel for corn, $8.30/bushel for soybeans and $5.10/bushel for wheat. Projected returns above variable costs (contribution margin) range from $109 to $240 per acre for corn and $179 to $337 per acre for soybeans. Projected returns above variable costs for wheat range from $152 to $262 per acre.

Return to Land is a measure calculated to assist in land rental and purchase decision making. The measure is calculated by starting with total receipts or revenue from the crop and subtracting all expenses except the land expense. Returns to Land for Ohio corn (Total receipts minus total costs except land cost) are projected to range from -$48 to $72 per acre in 2020 depending on land production capabilities. Returns to land for Ohio soybeans are expected to range from $65 to $214 per acre depending on land production capabilities. Returns to land for wheat (not including straw or double-crop returns) are projected to range from $70 per acre to $173 per acre.

Total costs projected for trend line corn production in Ohio are estimated to be $759 per acre. This includes all variable costs as well as fixed costs (or overhead if you prefer) including machinery, labor, management and land costs. Fixed machinery costs of $75 per acre include depreciation, interest, insurance and housing. A land charge of $187 per acre is based on data from the Western Ohio Cropland Values and Cash Rents Survey Summary. Labor and management costs combined are calculated at $67 per acre. Details of budget assumptions and numbers can be found in footnotes included in each budget.

Total costs projected for trend line soybean production in Ohio are estimated to be $517 per acre. (Fixed machinery costs: $59 per acre, land charge: $187 per acre, labor and management costs combined: $46 per acre.)

Total costs projected for trend line wheat production in Ohio are estimated to be $452 per acre. (Fixed machinery costs: $34 per acre, land charge: $187 per acre, labor and management costs combined: $41 per acre.)

Current budget analyses indicates favorable returns for soybeans compared to corn but crop price change and harvest yields may change this outcome. These projections are based on OSU Extension Ohio Crop Enterprise Budgets. Newly updated Enterprise Budgets for 2020 have been completed and posted to the Farm Office website: https://farmoffice.osu.edu/farm-management-tools/farm-budgets