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.
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)
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)
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/).
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
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.
Source: farmdoc daily (9):114
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 daily, May 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).