Economics

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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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!

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/).

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