Financial Trends and Issues in Agriculture

By: Chris Bruynis, Assistant Professor & Extension Educator

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.

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 loss $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.