What’s going on with Lumber Prices?

by: Brent Sohngen, Professor Environmental and Natural Resource Economics.

This article was originally published at: https://u.osu.edu/aede/2021/05/08/whats-going-on-with-lumber-prices/

In case you haven’t noticed, lumber prices have increased a lot over the last year.  Based on the US Bureau of Labor Statistics Lumber Price Index, which you can find here, lumber prices have increased 180% since April, 2020.  This increase started last fall, and has continued ever since. So, why have they risen, and how high will they go?

Let’s start with the first question, why have they risen?  The economic explanation is relatively straightforward: Demand rose rapidly due to pandemic related building, and supply is really inelastic, as we say in economics.  Thus, while the demand of wood has increased dramatically, the supply of wood hasn’t been able to keep up.  Let’s break this down.

Consider the demand side first.  The construction sector, specifically building and remodeling houses, is one of the largest demanders of lumber in the US and around the world.  New home starts and construction spending cratered at the beginning of the pandemic, but they rebounded pretty quickly.  Remodeling in particular seems to have picked up a real head of steam.

While demand for new construction and remodeling is hot, it’s actually now at about the same level as before the pandemic. So something else must be going on.  One of those something else’s is the price of steel, which has also increased dramatically in the US. Steel is a substitute for wood, especially in commercial construction, and rising steel prices have also driven up demand for lumber and other things that can be made out of wood or steel.

Ok, so the demand side is going crazy.  What about supply?

The supply side in forestry is really inelastic. That is, it’s hard to make big increases in supply in short periods of time.  There are lots of reasons for this.

First, you can’t build a lumber mill overnight.  And after some mills slowed down during the depths of the pandemic, and others closed, it’s not as simple as just turning the key to start the remaining ones back up.  You need trained workers, the machines are pretty complicated and may need some maintenance work before re-starting production, and you need logs.

Second, getting logs is not easy either.  There is a whole complicated supply chain associated with delivering logs to mills that itself has been affected by the pandemic.

Third, the supply of logs is super-inelastic because of the way trees grow.  Plantation trees, which supply around 50% of our timber in the US, put on a lot of value in the 5-10 years before they are harvested. Most people who own these trees don’t want to cut them too early because they’ll miss this value growth, which could be 8-12% or more per year.

When plantation trees are cut, they actually are still growing, perhaps 6% or more per year, so if prices start rising really quickly, many landowners may actually hold them longer than they would otherwise because they get some nice volume growth plus the price growth.   So when prices rise rapidly as they are now, the supply of logs contracts a bit because landowners hold onto their trees.  Seems strange, but the value growth that occurs with the rising prices gives people who own trees a real reason to put off logging for a while.

Fourth, the supply of logs from our main source of imported lumber, Canada, is super inelastic because most supply there is from public lands, and is controlled by government allowable cut constraints. These allowable cut constraints are set administratively, not economically, and thus limit their ability to increase supply in times of high demand.

There are some other issues at play, including US tariffs on wood, but most of this dramatic increase in prices is due to short-term market phenomena related to the rebound from the pandemic, not any long-term structural issues or limitations in supply. In fact, evidence from the US South, which is our main timber growing region in the US, indicates that an enormous area of trees has been planted in the last decade, providing a reasonably large long-term supply of wood.

Further, supplies of plantation timber in other productive regions of the world, especially South America, but also China, New Zealand, Australia, and parts of Southeast Asia, are expanding. The current high prices for lumber may linger for a while as demand continues to rebound from the pandemic, and due to overall inflationary pressures, but over the next 6 months to a year, prices should stabilize.  And over the longer-run, there will be plenty of wood to go around.

The Accuracy and Informativeness of Agricultural Baselines

by: Siddhartha Bora, a Ph.D. student and Ani Katchova, Professor and Farm Income Enhancement Chair, Department of Agricultural, Environmental, and Development Economics, The Ohio State University

United States Department of Agriculture (USDA) and Food and Agricultural Policy Research Institute (FAPRI), University of Missouri are two main sources of baseline projections for US agricultural sector. Published in the beginning of each year, the baselines provide insight about factors influencing the agricultural sector for the next decade. The projections present a conditional scenario based on certain assumptions about macro-economy, weather, and trade, and serve a basis for comparison of alternative policies. In a new study, we evaluate the accuracy and informativeness of USDA and FAPRI baselines since 1997. We find that the predictive content of most variables in the projections diminish after 4-5 years from the current year, and the USDA and FAPRI models do not outperform one another when entire projection path is considered.

The report is available at: https://aede.osu.edu/sites/aede/files/publication_files/AgBaselines2021.pdf

 

 

How Will Your Farm Emerge from the Coronavirus Pandemic?

by: Chris Zoller, Extension Educator, ANR, Tuscarawas County, David Marrison, Extension Educator, ANR, Coshocton County and Mike Estadt, Extension Educator, ANR, Pickaway County

Click here for PDF version of article

It has been more than a year since Coronavirus was declared a pandemic.  Everyone has been touched by the pandemic either directly or indirectly.  As an industry, Agriculture has experienced market disruptions and slowdowns in the processing sector due to the pandemic. In response, the United States government provided billions of dollars in economic relief in 2020 to assist farmers affected by the disruptions. This assistance has continued into 2021 as just recently the United States Department of Agriculture (USDA) announced details about the “Pandemic Assistance for Producers” Initiative.This article takes a look at federal farm support, forecasts for net farm income in 2021, and challenges farm managers to examine how their  business will emerge from the coronavirus pandemic.

US Governmental Farm Support

The following figure from the University of Illinois2  (Figure 3) shares the government farm support programs for the past fifteen years with a forecast for 2021.  Farm program payments have been cyclical and have ranged from a low of approximately $10 billion in 2014 to a high of nearly $45 billion in 2020.  The forecast for government payments in 2021 is around $25 billion.

Farm Income Forecast

The USDA’s Economic Research Service (ERS) 2021 Farm Income Forecast3 projects U.S. net farm income (NFI) to decrease $9.8 billion (8.1%) to $111.4 billion in 2021.  When indexed for inflation, net farm income is anticipated to decrease by $12 billion or 9.7%.  Net farm income is a broad measure of farm sector profitability that incorporates noncash items, including changes in inventories, economic depreciation, and gross credited rental income.  Despite the decline, NFI in 2021 is still expected to be 21 percent higher than the twenty-year average.  ERS predicts U.S. net cash farm income to decrease $10.4 billion (7.5 percent) to $128.3 billion in 2021. Net cash farm income is defined as cash receipts minus cash expenses and does not include changes in inventories or depreciation.

Underlying these forecasts, cash receipts for farm commodities are projected to rise $20.4 billion (5.5%) in 2021. Total animal receipts are expected to increase by $8.6 billion (5.2%) and total crop receipts are forecasted to increase by $11.8 billion (5.8%).  Direct government payments to farmers are expected to be 45.3% lower – a $21 billion decrease from 2020.  This decline is largely caused by lower anticipated payments from supplemental and ad hoc disaster assistance for COVID-19 relief. Total production expenses are forecasted to increase $8.6 billion (2.5%).

 Implications

As the pandemic subsides, it is almost certain that U.S. government farm support payments in 2021 and future years will be significantly lower.  The financial bottom line for many farm operations was positive in 2020 due to historically high ad-hoc payments.  Looking forward to 2021 there is much optimism in the crop sector due to the recent surge in crop prices and lower stock reports.  However, much can happen between now and next fall’s harvest.  It is anticipated that livestock and dairy producers will feel the effects of high grain prices when purchasing feed.

 Post-Pandemic Planning

As we analyze the crazy pandemic year of 2020 and its lingering impacts into this new year, we have been asked how successful farm businesses should plan as the pandemic subsides and life returns to “more normal.”

First, sound business practices and structure are the foundation for business to fall back on when facing internal and external disruptions.  Take time to develop or review your farm’s written Mission Statement, a brief statement that explains why you are in business.  Involve family and employees in the discussion.  It is also recommended to develop written goals – both short-term and long-term. You are more likely to achieve goals that are WRITTEN and shared with others. Post pandemic is also a great time to conduct a SWOT Analysis – to review the Strengths, Weaknesses, Opportunities, and Threats related to your business.  OSU Extension has some great resources to help you in analyzing the foundation of your business.  Check out these resources at:

Secondly, we also offer the following suggestions for you to consider as we move forward from the rollercoaster for 2020 and the early part of 2021:

  1. Do not rely on government farm programs as income sources as you develop enterprise budgets specific to your operation. Check out OSU budgets at: https://farmoffice.osu.edu/farm-mgt-tools/farm-budgets
  2. Work toward being a low-cost producer by knowing your cost of production. Higher crop prices can be a temptation not to be detailed in tracking expenses.  Make sure to track and monitor both variable and fixed expenses.
  3. Develop contingency plans and emergency preparedness plans for overcoming disruptions which impact your business. How will work get done if employees get sick or are in quarantine?  How will you overcome future slow-downs in the processing sector or if crops cannot be shipped to market?
  4. Enroll in the Ohio Farm Business Planning and Analysis Program to fully understand your farm operations financial strengths and weaknesses. Learn more here: https://farmprofitability.osu.edu/
  5. Review leases and contracts annually.
  6. Hold family meetings – to discuss finances, review your mission statement, complete a SWOT analysis, and develop goals. See this OSU Extension Fact Sheet: https://ohioline.osu.edu/factsheet/anr-43
  7. Network with your peers. Share successes and challenges.
  8. Form and meet with a farm business advisory team that may include one or more of the following: Extension Educator, accountant, lender, nutritionist, crop advisor, insurance agent, and others important to your business. See this OSU Extension factsheet:  https://ohioline.osu.edu/factsheet/anr-43
  9. Utilize OSU Extension resources – Ohio Ag Manager (https://u.osu.edu/ohioagmanager/), Farm Office (https://farmoffice.osu.edu/), Crop Observation and Recommendation Network (https://agcrops.osu.edu/), Beef Cattle Newsletter (https://u.osu.edu/beefteam/), and Buckeye Dairy Newsletter (https://dairy.osu.edu/).

Summary

The coronavirus pandemic has revealed that agriculture is a resilient industry.  Crops were still planted and harvested;  livestock continued to be cared for.  Despite some infrastructure issues related to food processing, Americans were still able to access safe and affordable food.  The pandemic has revealed how dependent the agricultural supply chain is on timely delivery of goods and services, healthy and available agricultural workers, and a confident consumer willing to adapt and adopt new buying practices.

As Americans begin to exit the last throes of the pandemic’s lockdowns, return to work and school, and begin life anew, reflection on emergency preparedness should be re-evaluated and adjusted plans put in place.  Each farm business should continue to put contingency plans in place for the next disruption. And, make sure you keep an adequate supply of toilet paper on hand, just in case!

References

1USDA Pandemic Assistance for Producers. Accessed from: https://www.farmers.gov

2Good, Keith. USDA Announces “Pandemic Assistance for Producers”, New CFAP Aid.  March 25, 2021. https://farmpolicynews.illinois.edu/2021/03/usda-announces-pandemic-assistance-for-producers-new-cfap-aid/

32021 Farm Sector Income Forecast. Accessed from: https://www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/farm-sector-income-forecast/

 

 

 

 

Farm Bankruptcies Update: Fourth Quarter of 2020

by: Kevin Kim, a Ph.D. student and Ani Katchova, Professor and Farm Income Enhancement Chair, Department of Agricultural, Environmental, and Development Economics, The Ohio State University

The number of Chapter 12 bankruptcy filings has not increased in the fourth quarter of 2020 nor in all quarters of 2020 as many had been initially concerned at the beginning of the pandemic. The U.S. farm economy has been supported by strong government payments which reached $46.3 billion in 2020, the largest amount in history. Combined with strong farmland values and low interest rates, the farm bankruptcy rate in Ohio rather decreased in 2020, with 1.29 farm bankruptcies per 10,000 farms.

The report is available at:

https://aede.osu.edu/sites/aede/files/publication_files/BankruptcyUpdate2020Q4.pdf

 

Ohio Local Bank Market Conditions

by: Kevin Kim, a Ph.D. student and Ani Katchova, Professor and Farm Income Enhancement Chair, Department of Agricultural, Environmental, and Development Economics, The Ohio State University

The US banking sector and local community banks faced great uncertainty in 2020 due to the pandemic. The consolidation intensity within US banking sector continued in 2020. Ohio experienced a similar trend, with continued decrease in the number of community banks. However, Ohio banks remained highly profitable relative to the national average, and the credit availability increased significantly as the increase in the amount of bank deposits outpaced the increase in the amount of loans. Overall Ohio banks slightly increased bankruptcy risks in 2020 but are still more resilient than the national average.

The full report is available at:

https://aede.osu.edu/sites/aede/files/publication_files/OhioLocalBankMarketConditions.pdf

Are Starlink Satellites the Solution to Rural Internets Setbacks? 

By: Andrew Holden, Extension Educator, Agriculture & Natural Resources, The Ohio State University Extension

Disclaimer: The purpose of this article is to provide you with information about a new internet service technology and is not an endorsement of the company or their services. I hope that this information will assist you in making informed decisions and help you learn more about the importance of high-speed internet for rural communities.  

Slow internet can frustrate almost anyone, but if you live in a rural area, slow internet, if any, can often be your only choice. The lack of highspeed internet access has been a concern for many years in rural America. While companies slowly improve service and governmental programs try to address these issues, many rural residents are left waiting for faster internet that can’t come soon enough. One company that is attempting to close this digital divide is SpaceX, with their high-speed satellite internet system called Starlink. While Starlink is just beginning to roll out service, the initial results appear to be promising.

Rural communities and Tribal lands have far less access to high-speed internet compared to those in more populated areas. The Federal Communications Commission considers high-speed broadband internet as being able to provide 25 Mbps download speeds and 3 Mbps upload speeds. According to the FCC’s, 2020 Broadband Deployment Report, “22.3% of Americans in rural areas and 27.7% of Americans in Tribal lands lack coverage from fixed terrestrial 25/3 Mbps broadband, as compared to only 1.5% of Americans in urban areas”. Those without high-speed internet access can often be categorized under the phrase ‘last mile’ customers. The last mile problem can be described as the customers at the end of the communication line that are more expensive to reach and located farther apart. As unfortunate as it is, in basic terms, companies would rather run a mile of infrastructure in an area that will yield 25 customers than run a mile for just one customer. Diminishing returns leads to internet companies being unwilling to improve internet in rural areas, as well as less competition for existing providers.

The impact of the digital divide can be felt across the US by those living in small and rural towns. Many aspects of modern life are affected by access to high-speed internet, including education, healthcare, entertainment, and employment. In a report from Michigan State University’s Quello Center, students with slow or limited internet access lacked digital skills and performed lower on standardized tests. In addition to education, 2020 highlighted the future of working remotely and virtual healthcare appointments which rely on faster internet. Rural businesses, from farms to manufacturing, benefit from better internet speeds as well, making it quicker to send and receive information. As technology improves and expands, more people in rural areas are slowly receiving better internet services, but one company that may have the ability to close the gap seemingly overnight is SpaceX.

SpaceX, short for the Space Exploration Technologies Corporation, is an aerospace manufacturer founded by Elon Musk. Musk is also the founder of the popular electric  vehicle company Tesla Motors. One of SpaceX’s business endeavors is providing satellite internet access via a satellite consolation called Starlink. This isn’t like the traditional satellite internet that has been offered over the years. Starlink uses satellites in low Earth orbit that allow for shorter distances and speeds over 100 mbps for those in the beta testing program. Speeds like that would be a huge improvement for almost anyone in a rural area and can be offered remotely to the hardest to reach places. In February, Starlink opened pre-orders to the public and has been slowly filling orders ever since. With the high demand for the service, many orders are slated to be filled by the end of 2021 depending on your location. The current advertised cost for the service is $99.00 per month with the hardware, including a small satellite dish and a router, for a $499.00 onetime payment. On their website Starlink states service will be offered on a first come, first served basis, and is currently taking $100 down payments to get in line for the service. If you are interested in seeing if service is available in your area, or signing up yourself, you can visit www.Starlink.com to do so.

Will Starlink satellites be the solution to our rural internet woes? When considering access to high-speed internet service in rural areas, one thing that has historically lacked were options to choose from. Starlink will provide another option, or possibly the first option, to those living with poor to no access to internet and may solve the last mile problem for many rural communities. Even those who do not use Starlink’s service could benefit from the competition that will encourage traditional internet providers to improve their infrastructure and speeds. Rural communities here in Ohio and across the United States could benefit greatly with better internet access and Starlink is on its way to providing it.

2020 Broadband Deployment Report: https://www.fcc.gov/reports-research/reports/broadband-progress-reports/2020-broadband-deployment-report

Poor Internet connection leaves rural students behind: https://msutoday.msu.edu/news/2020/poor-internet-connection-leaves-rural-students-behind#:~:text=Slow%20Internet%20connections%20or%20limited,college%20admissions%20and%20career%20opportunities.

 

 

 

 

Farm Office Live to Analyze USDA’s Pandemic Assistance for Producers Initiative

By Barry Ward, David Marrison, Peggy Hall, Dianne Shoemaker and Julie Strawser – Ohio State University Extension

April’s “Farm Office Live” will focus on details of the USDA’s Pandemic Assistance for Producers” initiative announced on March 24, 2021. Changes were made in effort to reach a greater share of farming operations and improve USDA pandemic assistance.

During the webinar, we will be sharing details about the pandemic initiative and discussing some of the changes made to the Coronavirus Food Assistance Program (CFAP).  Our Farm Office Team will also provide a legislative update and discuss changes to the Paycheck Protection Program and Employee Retention Credits. They will also be on hand to answer your questions and address any related issues.

Two live sessions will be offered on Wednesday, April 7, from 7:00 – 8:30 p.m. and again on Friday, April 9, from 10:00 – 11:30 a.m. A replay will be available on the Farm Office website if you cannot attend the live event.

Farm Office Live is a webinar series addressing the latest outlook and updates on ag law, farm management, ag economics, farm business analysis and other related issues. It is presented by the faculty and educators with the College of Food, Agricultural and Environmental Sciences at The Ohio State University.

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.

USDA Announces Pandemic Assistance to Farmers

by: Chris Zoller, Extension Educator, ANR, Tuscarawas County

Source of Information: https://www.farmers.gov/

The United States Department of Agriculture (USDA) announced this week it is establishing new programs and efforts to provide financial assistance to farmers negatively impacted by the Coronavirus pandemic.

The new program is called the USDA Pandemic Assistance for Producers and is intended to reach a broader representation of producers than previous COVID-19 aid programs.  The program will place a greater emphasis on small and socially disadvantaged producers, specialty crop and organic producers, timber harvesting, as well as support for the food supply chain and producers of renewable fuels.

The USDA Pandemic Assistance for Producers program administered by the Farm Service Agency (FSA) includes four parts.  Details below were provided in a news release from USDA.

Part 1:

USDA will dedicate at least $6 billion to develop a number of new programs or modify existing proposals using discretionary funding from the Consolidated Appropriations Act and other coronavirus funding that went unspent by the previous administration. Where rulemaking is required, it will commence this spring. These efforts will include assistance for:

  • Dairy farmers through the Dairy Donation Program or other means:
  • Euthanized livestock and poultry;
  • Biofuels;
  • Specialty crops, beginning farmers, local, urban and organic farms;
  • Costs for organic certification or to continue or add conservation activities
  • Other possible expansion and corrections to CFAP that were not part of today’s announcement such as to support dairy or other livestock producers;
  • Timber harvesting and hauling;
  • Personal Protective Equipment (PPE) and other protective measures for food and farm workers and specialty crop and seafood producers, processors and distributors;
  • Improving the resilience of the food supply chain, including assistance to meat and poultry operations to facilitate interstate shipment;
  • Developing infrastructure to support donation and distribution of perishable commodities, including food donation and distribution through farm-to-school, restaurants or other community organizations; and
  • Reducing food waste.

Part 2:

USDA expects to begin investing approximately $500 million in expedited assistance through several existing programs this spring, with most by April 30. This new assistance includes:

  • $100 million in additional funding for the Specialty Crop Block Grant Program, administered by the Agricultural Marketing Service (AMS), which enhances the competitiveness of fruits, vegetables, tree nuts, dried fruits, horticulture, and nursery crops.
  • $75 million in additional funding for the Farmers Opportunities Training and Outreach program, administered by the National Institute of Food and Agriculture (NIFA) and the Office of Partnerships and Public Engagement, which encourages and assists socially disadvantaged, veteran, and beginning farmers and ranchers in the ownership and operation of farms and ranches.
  • $100 million in additional funding for the Local Agricultural Marketing Program, administered by the AMS and Rural Development, which supports the development, coordination and expansion of direct producer-to-consumer marketing, local and regional food markets and enterprises and value-added agricultural products.
  • $75 million in additional funding for the Gus Schumacher Nutrition Incentive Program, administered by the NIFA, which provides funding opportunities to conduct and evaluate projects providing incentives to increase the purchase of fruits and vegetables by low-income consumers
  • $20 million for the Animal and Plant Health Inspection Service to improve and maintain animal disease prevention and response capacity, including the National Animal Health Laboratory Network.
  • $20 million for the Agricultural Research Service to work collaboratively with Texas A&M on the critical intersection between responsive agriculture, food production, and human nutrition and health.
  • $28 million for NIFA to provide grants to state departments of agriculture to expand or sustain existing farm stress assistance programs.
  • Approximately $80 million in additional payments to domestic users of upland and extra-long staple cotton based on a formula set in the Consolidated Appropriations Act, 2021 that USDA plans to deliver through the Economic Adjustment Assistance for Textile Mills program.

Part 3:

The Consolidated Appropriations Act, 2021, enacted December 2020 requires FSA to make certain payments to producers according to a mandated formula. USDA is now expediting these provisions because there is no discretion involved in interpreting such directives, they are self-enacting.

  • An increase in CFAP 1 payment rates for cattle. Cattle producers with approved CFAP 1 applications will automatically receive these payments beginning in April. Information on the additional payment rates for cattle can be found on farmers.gov/cfap. Eligible producers do not need to submit new applications, since payments are based on previously approved CFAP 1 applications. USDA estimates additional payments of more than $1.1 billion to more than 410,000 producers, according to the mandated formula.
  • Additional CFAP assistance of $20 per acre for producers of eligible crops identified as CFAP 2 flat-rate or price-trigger crops beginning in April. This includes alfalfa, corn, cotton, hemp, peanuts, rice, sorghum, soybeans, sugar beets and wheat, among other crops. FSA will automatically issue payments to eligible price trigger and flat-rate crop producers based on the eligible acres included on their CFAP 2 applications. Eligible producers do not need to submit a new CFAP 2 application. For a list of all eligible row-crops, visit farmers.gov/cfap. USDA estimates additional payments of more than $4.5 billion to more than 560,000 producers, according to the mandated formula.
  • USDA will finalize routine decisions and minor formula adjustments on applications and begin processing payments for certain applications filed as part of the CFAP Additional Assistance program in the following categories:
    • Applications filed for pullets and turfgrass sod;
    • A formula correction for row-crop producer applications to allow producers with a non-Actual Production History (APH) insurance policy to use 100% of the 2019 Agriculture Risk Coverage-County Option (ARC-CO) benchmark yield in the calculation;
    • Sales commodity applications revised to include insurance indemnities, Noninsured Crop Disaster Assistance Program payments, and Wildfire and Hurricane Indemnity Program Plus payments, as required by statute; and
    • Additional payments for swine producers and contract growers under CFAP Additional Assistance remain on hold and are likely to require modifications to the regulation as part of the broader evaluation and future assistance; however, FSA will continue to accept applications from interested producers.

Part 4:

USDA will re-open sign-up for of CFAP 2 for at least 60 days beginning on April 5, 2021.

  • FSA has committed at least $2.5 million to establish partnerships and direct outreach efforts intended to improve outreach for CFAP 2 and will cooperate with grassroots organizations with strong connections to socially disadvantaged communities to ensure they are informed and aware of the application process.

Summary

Applications for this program will open on April 5th.  Anyone interested in additional information about the USDA Pandemic Assistance to Producers program is encouraged to see https://www.farmers.gov/pandemic-assistance/cfap or their local FSA office.

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

Working capital is calculated by subtracting current liabilities from current assets.  Let’s assume a farm has $300,000 in current assets and $175,000 in current liabilities.  This farm has $25,000 ($300,000 – $175,000) in working capital.   There is no standard dollar amount of working capital needed for businesses as it will vary by farm size.   Comparing total working capital to gross revenues does provide an indicator of whether a farm’s working capital is “enough”.  USDA-ERS forecasts a 13.6% decline in working capital in 2021 from 2020. If realized, this would be the largest decline since 2016.

See the table below to see how your farm compares.

Working Capital to Gross Revenue Ranges

>30% Strong
10% to 30% Caution
<10% Vulnerable

(Source: University of Minnesota Extension  https://extension.umn.edu/farm-finance/ratios-and-measurements)

Current Ratio

The current ratio is sometimes used when discussing liquidity.  The current ratio is determined by dividing current assets by current liabilities.  Using the example above, this farm has a current ratio of 1.7 ($300,000/$175,000).  In this example, for every $1 of current debt (liabilities), there is $1.70 of current assets available to cover it.  Using the benchmark chart below, this farm falls into the “caution” category.

 Current Ratio Ranges

Greater than 2.0 Strong
1.3 to 2.0 Caution
Less than 1.3 Vulnerable

(Source: University of Minnesota Extension https://extension.umn.edu/farm-finance/ratios-and-measurements)

Times Interest Earned Ratio

The times interest earned ratio is a less commonly known measure used to gauge the ability to service the interest portion of debt out of net farm income. Typically, interest is a cash expense and the principal portion of debt is paid out of net farm income. The times interest earned ratio is calculated as net farm income, less interest expense, divided by interest expense. A value less than 1 indicates that there is not enough cash coming from farm operations to make interest payments. Without a cash inflow from outside the farm, the ability to make interest payments would require borrowing or selling assets. It also indicates that the farm business is not generating sufficient dollars to make scheduled principal payments.  A higher times interest earned ratio indicates greater ease in making interest payments. USDA-ERS forecasts the times interest earned ratio will decrease from 9.2 in 2020 to 8.4 in 2021. Still, the times interest earned ratio is forecasted to remain above 2014-19 levels.

Summary

It is important to remember that examining only one measure can give a skewed, incomplete picture of farm financial performance.  An in-depth analysis of income, expenses, assets, liabilities, and cash flow is needed to provide a comprehensive understanding of financial performance.

I encourage you to schedule a meeting with your lender or Extension Educator to review your balance sheet, crunch some numbers, and discuss any questions as you develop a plan.  Whole farm analysis through the Ohio Farm Business Analysis program will also generate these critical financial numbers for your farm as well as benchmark reports with industry comparisons.  Additional information is available here: https://farmprofitability.osu.edu.

 

Sources:

Farm Sector Liquidity Forecast to Decline in 2021, United States Department of Agriculture – Economic Research Service, https://www.ers.usda.gov/amber-waves/2021/march/farm-sector-liquidity-forecast-to-decline-in-2021/

Ratios and Measurements in Farm Income, University of Minnesota, https://extension.umn.edu/farm-finance/ratios-and-measurements#liquidity-796060

The Basics of a Farm Balance Sheet, Ohio State University Extension, https://ohioline.osu.edu/factsheet/anr-64

Lady Landlord Program held for all farmland owners and farmers

By: Eric Richer and Melissa Rupp, Extension Educators Fulton County

Do you have questions for what are the best practices for farmland leasing? Would you like to incorporate conservation practices or other items into your lease agreement? Do you know what should be in writing? If you are a farmland owner or farmer and you have these types of questions, consider attending the Lady Landlord program on Tuesday, March 23 from 9 am to 1 pm at the Robert Fulton Agriculture Center, 8770 State Route 108, Wauseon, OH. Attorney Peggy Hall, OSU Extension Ag Law Specialist, will discuss the legal aspects of farmland leasing, Beth Scheckelhoff, OSU Extension Educator-Putnam County, will discuss landlord-tenant communication, and Melinda Robison, Andres, Oneil & Lowe Insurance Agency, will discuss key insurance aspects of farmland leasing.  Other topics will include understanding the current market’s cost of production (enterprise budgets), incorporating conservation into leases, and farmland liability coverage.  This program is open to all farmland owners and farmers.

Registration cost includes lunch and materials is $20 per landowner or farm family and is due by March 19.  Must be pre-registered to attend. Registration link: www.go.osu.edu/2021FultonLadyLandlord