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

Seed Corn Costs: How Do Discounts Work with Seed Company Financing?

Source: Farmdoc, Chad Fiechter and Jennifer Ifft, Cornell University

To manage input costs, many producers take advantage of early pay and other discounts offered by input suppliers. Seed and chemicals often have complex pricing, with a range of pre-pay discounts, volume discounts, rebates and other incentives. On top of that, financing options are almost always available, with their own schedule of discounts and fees. This series addresses the following aspects of seed corn costs: (1) early cash payment and volume discounts (2) discounts under seed company financing options, and (3) the cost of seed company financing relative to traditional financing. In our first article (farmdoc daily October 10, 2019), we created a hypothetical discount schedule based on published discount schedules to show that seed discounts can easily reduce costs by over 20 percent  of the base price with early cash payment and volume discounts. In this article, we use this information to consider how discounts work under seed company financing.

Most seed companies offer financing under a separate discount schedule, which we summarize in Table 1. As we discussed in our previous article, we do not account for base price, but consider only the potential range of prices across an individual company, holding base price constant. Locking in financing early and obtaining a volume discount can lead to discounts from the base price in the range of 15 percent, which offers meaningful cost savings.

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Soybean Prevent Planting Decisions in Middle June, Cover Crops, and MFP Payments

Source: farmdoc daily (9):114

Click here to watch Dr. Schnitkey’s video

Farmers across the Midwest can now take prevent planting payments on soybeans, as final planting dates for crop insurance purposes have arrived. Our comparisons suggest that planting soybeans do not have higher returns than taking a prevent planting payment given a high coverage level on crop insurance. However, the risk for lower returns from planting as compared to taking the prevent planting payment is limited as crop insurance provides a floor on revenue.  These risks become greater the later soybeans are planted in the late planting period. The economic advisability of planting soybeans depends on receiving Market Facilitation Payments and no additional Federal aid for prevent planting acres.  Our current projections indicate that returns from either prevent planting or planting soybeans will not cover costs and working capital will be eroded. At the end of this article, links to YouTube videos provide the latest information on cover crops and the Market Facilitation Program as well as a general background on preventing planting.

Yield Declines and Soybean Prevent Plant Decisions in 2019

Final planting dates for soybeans have passed in all the Corn Belt (see farmdoc dailyMay 7, 2019). For Illinois, the final planting date is June 15 for northern Illinois counties and June 20 for central and southern Illinois counties. After reaching the final planting date, farmers can take soybean preventing plant payments on farmland that was intended to be planted to soybeans if they had purchased a COMBO crop insurance plan (Revenue Protection (RP), RP with harvest price exclusion, and Yield Protection). Farmers can continue to plant soybeans, however, the crop insurance guarantee goes down 1 percent per day for each day after the final planting date during the late period. In Midwest states, the late planting period lasts 25 days after the final planting date.  After the late planting period, soybeans can still be planted, but the guarantee is 60% of the original revenue guarantee.

A key to evaluating the plant versus prevent plant decision is assessing yield losses from late planting. A comparison of double-crop soybean yields to full-season soybean yields in southern Illinois provides some indications of yield declines with late planting. Yield data were obtained from Illinois Farm Business Farm Management (FBFM). From 2012 to 2019, double-crop soybean yields averaged 38 bushels per acre, 75% of the average full-season yield of 51 bushels per acre (see Table 1).

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Mid to Late June Prevented Planting Decisions

Source:Ben Brown, Sarah Noggle, Barry Ward, OSU Extension

Consistent rains across Ohio and the Corn Belt continue to delay planting progress as the June 17 USDA Planting Progress report showed that 68% of intended corn acres and 50% of intended soybean acres have been planted in Ohio. Nationwide, roughly 27 million acres of corn and soybeans will either be planted or filed under prevented planting insurance. Across Ohio, the Final Plant Date (FPD) for soybeans is June 20. Soybeans can be planted after the FPD, but a one percent reduction in the insurance guarantee occurs. This brief article outlines economic considerations for soybean prevented planting under three scenarios: planting soybeans on corn acres, planting soybeans late, and taking prevent plant soybeans. There are three sections to this article: a brief market update on corn and soybeans, a policy update on Market Facilitation Payments, and then finally the scenarios listed above. This article contains the best information available as of release, but conditions may change. Farmers should check with their crop insurance agents when making prevented planting decisions. OSU Extension is not an authorizing body of federal crop insurance policies.

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Ohio Corn, Soybean and Wheat Enterprise Budgets – Projected Returns for 2019

Source: Barry Ward, Leader, Production Business Management & Director, OSU Income Tax School

Production costs for Ohio field crops are forecast to be largely unchanged from last year with slightly higher fertilizer and interest expenses that may increase total costs for some growers. Variable costs for corn in Ohio for 2019 are projected to range from $356 to $451 per acre depending on land productivity. Variable costs for 2019 Ohio soybeans are projected to range from $210 to $230 per acre. Wheat variable expenses for 2019 are projected to range from $178 to $219 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 2019 crop enterprise budgets are $3.60/bushel for corn, $8.20/bushel for soybeans and $4.25/bushel for wheat. Projected returns above variable costs (contribution margin) range from $150 to $308 per acre for corn and $144 to $300 per acre for soybeans. Projected returns above variable costs for wheat range from $102 to $202 per acre (assuming $4.25 per bushel summer cash price).

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 $23 to $182 per acre in 2018 depending on land production capabilities. Returns to land for Ohio soybeans are expected to range from $84 to $254 per acre depending on land production capabilities. Returns to land for wheat (not including straw or double-crop returns) are projected to range from negative $2 per acre to a positive $143 per acre.

Total costs projected for trend line corn production in Ohio are estimated to be $753 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 $66 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 $69 per acre. Returns Above Total Costs for trend line corn production are negative at -$120 per acre.

Total costs projected for trend line soybean production in Ohio are estimated to be $518 per acre. (Fixed machinery costs – $52 per acre, land charge: $187 per acre, labor and management costs combined: $45 per acre.) Returns Above Total Costs for trend line soybean production are also projected to be negative at -$76 per acre.

Total costs projected for trend line wheat production in Ohio are estimated to be $488 per acre. (Fixed machinery costs: $52 per acre, land charge: $187 per acre, labor and management costs combined: $39 per acre.) Returns Above Total Costs for trend line wheat production are also negative at -$137 per acre.

These projections are based on OSU Extension Ohio Crop Enterprise Budgets. Newly updated Enterprise Budgets for 2019 have been completed and posted to the OSU Extension farmoffice website: https://farmoffice.osu.edu/farm-management-tools/farm-budgets

Prevented Planting, 2019 Market Facilitation Program Payments, Disaster Assistance, and Price Dynamics

Source: Schnitkey, G., C. Zulauf, K. Swanson, R. Batts and J. Coppess, Department of Agricultural and Consumer Economics, University of Illinois

We stand at a point of extreme price and policy uncertainty.  In the Midwest, corn planting is historically late and many acres are or soon will be eligible for prevented planting payments on corn crop insurance policies.  On many farms, corn prices have not increased enough to cause net returns from planting corn to exceed net returns from prevented planting.  However, the U.S. Department of Agriculture announced a 2019 Market Facilitation Program (MFP) and has currently indicated that payments will be tied to 2019 planted acres.  The 2019 MFP could provide incentives to plant crops and not take prevented planting payments.  Moreover, this program could bring a little used option into play this year:  take 35% of the corn prevented planting payment and plant soybeans after the late planting period for corn.   Adding confusion to this situation is a disaster assistance program working its way through Congress. We provide detail on the 2019 MFP program based upon what is known at this time, and the Congressional disaster assistance bill.  Then, we evaluate farmer options at this point.  Decisions are difficult.  Corn prices have not risen enough to justify planting corn on many farms.  Yet, corn prices could increase if a large number of prevent planting acres occur.

2019 Market Facilitation Program Payments

In a May 23rd press release, the U.S. Department of Agriculture (USDA) outlined the 2019 Market Facilitation Program (MFP). This program is projected to provide $14.5 billion in direct payments to farmers of specific commodities, $4.9 billion more than the $9.6 billion spent on the 2018 MFP (Schnepf, Monke, Stubbs, and Hopkinson). Important details of this program are:

  • Payments will be based on 2019 planted acres to MFP-covered crops. USDA has initially stated that payments will not be received on prevented planting acres but the final details have yet to be released. By itself, this provision provides incentives to plant crops and not take prevented planting payments.
  • MFP-covered crops in 2019 include corn, soybeans, wheat, alfalfa hay, barley, canola, crambe, dry peas, extra-long staple cotton, flaxseed, lentils, long grain and medium grain rice, mustard seed, dried beans, oats, peanuts, rapeseed, safflower, sesame seed, small and large chickpeas, sorghum, sunflower seed, temperate japonica rice, and upland cotton.
  • There will be a single payment rate for a county. That per acre payment rate will be based on total plantings of the MFP-covered crops on the individual farm. Acres planted to an individual crop will not matter other than its contribution to total planted MFP crops on the farm.  As an example, suppose that MFP rate for a county is $50 per acre. A farm with 60 acres in corn and 40 acres in soybeans will have 100 MFP acres and receive $5,000.  The farm will also receive $5,000 if 40 acres are corn and 60 acres are soybeans.
  • Payments acres in 2019 cannot exceed the payment acres on the farm for the 2018 MFP. This restriction is designed to prevent more acres moving into covered crops, particularly from grasslands or lands typically not farmed. It will most likely be made on a Farm Service Agency (FSA) farm basis. A farm that had 80 MFP-acres in 2018 cannot receive payments on more than 80 acres in 2019.  (see, Perdue Provides More Clarity on Tariff Aid).
  • Payments will be made in three tranches, the first in late July/early August after the July 15th planting reporting date with the Farm Service Agency (FSA), November, and early January.  Whether or not the November and early January payments are made will depend on USDA determination on the need for these payments.

Many important questions remain to be answered regarding 2019 MFP payments; the answers to these questions could affect 2019 planting decisions.   The most important question is:  What are the 2019 per acre payment rates?

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Corn vs. Soybeans in a Delayed Planting Scenario – Profit Scenarios

Source: Barry Ward, OSU Extension

Wet weather and planting delays throughout much of Ohio and the eastern Cornbelt have many producers thinking about switching corn acres to soybeans or the taking the prevented planting option of their Multiple Peril Crop Insurance policy. Ohio had 9% of intended corn acres planted by May 19th which is far behind the 5 year average of 62%. Farms with pre-plant nitrogen or herbicides applied for corn production may have no option to switch to soybeans. Seed availability may also limit choice for some. Other factors, such as strict adherence to a crop rotation or landlord considerations may limit farmer choice when it comes to switching from corn to soybean plantings in a given year. Farm leases may contain specifications on crop rotations or even what crops may be grown. There may also be unwritten agreements between parties that limit the possibility of growing soybeans in successive years.

Producers that don’t have these limitations may be considering the option of switching acres to soybeans and it will likely come down to expected profit. Field by field budgeting is recommended and with delayed planting the yield expectations change as we move later into the growing season. What will be the likely yields for a given farm for the two crop choices? A recent article, “Delayed Planting Effects on Corn Yield: A “Historical” Perspective” is a good starting point in evaluating potential yield loss due to late corn planting: https://agcrops.osu.edu/newsletter/corn-newsletter/2019-12/delayed-planting-effects-corn-yield-%E2%80%9Chistorical%E2%80%9D-perspective

A recent article highlighting faculty in the College of Food, Agricultural and environmental Sciences always provides valuable insight into the possible yield swings related to late plantings of corn and soybeans: https://cfaes.osu.edu/news/articles/late-start-planting-might-not-hurt-yields-much

Looking at some simple scenarios may get your budgeting process moving for your own fields. These scenarios are based on the 2019 crop enterprise budgets available online at: https://farmoffice.osu.edu/farm-management-tools/farm-budgets

Scenario 1 – Yield prospects remain unchanged, new estimated revenue based on today’s markets:

Corn – 170.2 bu/a & 4.00/bu

Returns Above Variable Costs     $293

Soybeans – 51.5 bu/a & 7.90/bu

Returns Above Variable Costs     $207

Price changes in the last 3 weeks have been favorable to corn and shows some advantage to corn with these assumptions using OSUE Enterprise Budgets.

Scenario 2 – Corn yield 13% lower (per OSU Agronomy Guide, planting date 5-22 through 5-27), soybean yields remain unchanged, new estimated revenue based on today’s markets:

Corn – 148 bu/a & 4.00/bu

Returns Above Variable Costs     $227

Soybeans – 51.5 bu/a & 7.90/bu

Returns Above Variable Costs     $207

The choice becomes closer as we see corn still outperforming soybeans (barely) in Returns Above Variable Costs.

Scenario 3 – Corn yield 13% lower (per OSU Agronomy Guide, planting date 5-22 through 5-27), soybean yields 5% lower, soybean seed costs higher due to higher seeding rate (additional 30,000 seeds per acre planted) for late planted soybeans, new estimated revenue based on today’s markets:

Corn – 148 bu/a & 4.00/bu

Returns Above Variable Costs     $227

Soybeans – 48.9 bu/a & 7.90/bu

Returns Above Variable Costs     $175

This choice again favors corn as the lower soybean yield due to late planting and additional seeding costs make the choice of corn somewhat stronger compared to Scenario 2.

The recent announcements of another round of Market Facilitation Payments and changes to Prevented Planting Coverage due to the pending Disaster Aid Bill may add further complexity to this choice.

As planting is delayed further into June the potential lower yields of both corn and soybeans due to a later planting window will tend to favor soybeans. These simplified scenarios are just examples and farmers should budget for the different yield, price and cost combinations based on their own numbers.