by: Chris Zoller, Extension Educator, ANR in Tuscarawas County
The United States Department of Agriculture Economic Research Service (USDA ERS) released this report (https://www.ers.usda.gov/webdocs/publications/105388/eib-247.pdf?v=4061.7) in December 2022. The United States Department of Agriculture Economic Research Service America’s Farms and Ranches at a Glance summarizes a number of metrics about U.S. agriculture. This paper highlights two indicators (Operating Profit Margin and Current Ratio) of the financial performance of U.S. farms and ranches.
Two Definitions
Since the 1970’s, USDA ERS has defined a farm as any place where, each year, $1,000 of agricultural goods were produced and sold. USDA ERS uses acres of crops and heads of livestock to determine whether the definition is met. Farm size is measured by Gross Cash Farm Income (GCFI), a measure of revenue, including acres of crops or numbers of head of livestock produced and sold.
Types of Farms
USDA ERS classifies farms into several types. The following definitions are taken from the report:
Small family farms (GCFI less than $350,000)
- Retirement farms: Small farms whose principal operators report having retired from farming, though continuing to farm on a small scale.
- Off-farm-occupation farms: Small farms whose principal operators report a primary occupation other than farming.
- Farming-occupation farms: Small farms whose principal operators report farming as their primary occupation. Farming-occupation farms are further sorted into two classes:
- Low-sales: Farms with a GCFI of less than $150,000.
- Moderate-sales: Farms with a GCFI between $150,000 and $349,999.
Midsize family farms (GCFI between $350,000 and $999,999)
- Farms with a GCFI between $350,000 and $999,999.
Large-scale family farms (GCFI of $1,000,000 or more)
- Large farms: Farms with a GCFI between $1,000,000 and $4,999,999.
- Very large farms: Farms with a GCFI of $5,000,000 or more.
Nonfamily farms
- Any farm where any operator and any individuals related to them do not own a majority (50 percent) of the business.
The table below summarizes farms by type, number, acres, and value of farm production.
Financial Performance
The Operating Profit Margin (OPM) is one measure of farm financial performance. The OPM is the share of gross income that is profit. In 2021, between 50 and 81 percent of small family farms had an OPM in the danger zone (less than 10 percent).
Large family farms, in 2021, were more likely to have a positive OPM (of at least 25 percent). Positive on-farm income was also more likely for this classification.
Farms in the medium-risk category had an OPM greater than 10 percent and less than 25 percent. Between 5 percent and 32 percent of these farms were in this category in 2021.
The current ratio is another measure of financial performance. This ratio is calculated by taking current assets divided by current liabilities and is a simple method to determine whether a farm has enough capital to pay current liabilities. A ratio less than one indicates a farm is unable to pay its current liabilities if all current assets were liquidated.
In 2021, 57 percent of farms had a current ratio greater than one.
In 2021, 52 percent and 47 percent of retirement and off-farm occupation farms, respectively, had the highest percentage of farms with a current ratio of less than 1. However, many of these farms rely on off-farm income to compensate for the lower current ratio.
Between 23 percent and 25 percent of moderate, mid-size, and large family farms were in danger of being unable to meet current obligations in 2021.
Assistance
If you are interested in learning more about your financial performance, talk to your lender or your local OSU Extension professional about the OSU Extension Farm Business Analysis and Benchmarking Program. Additional information is available here: https://farmprofitability.osu.edu/.
Reference
America’s Farm and Ranches at a Glance, 2022, United States Department of Agriculture Economic Research Service, available at: https://www.ers.usda.gov/webdocs/publications/105388/eib-247.pdf?v=4061.7