U.S. Farm Liquidity Measures Projected to Decline in 2020

by: Chris Zoller, Extension Educator, ANR

Click here for Article (access the figures)

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.

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/).

References

Assets, Debt, and Wealth, United States Department of Agriculture Economic Research Service, https://www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/assets-debt-and-wealth/

Deterioration of Working Capital, University of Illinois Farmdoc, https://farmdocdaily.illinois.edu/2020/03/deterioration-of-working-capital.html

Improve Understanding of Your Farm’s Working Capital, Michigan State University Extension, https://www.canr.msu.edu/news/improving_understanding_of_your_farms_working_capital

Minding Your Balance Sheet and Working Your Working Capital, University of Illinois Farmdoc, https://farmdocdaily.illinois.edu/2019/01/minding-your-balance-sheet-working-your-working-capital.html

The Basics of a Farm Balance Sheet, Ohio State University Extension, https://ohioline.osu.edu/factsheet/anr-64#:~:text=The%20farm%20balance%20sheet%20is,information%20about%20a%20farm%20business.&text=The%20balance%20sheet%20is%20also,solvency%2C%20and%20risk%20bearing%20capacity.

 

 

Farm Office Live Webinar Slated for Thursday, June 11 at 9:00 a.m.

OSU Extension is pleased to be offering the a “Farm Office Live” session on Thursday morning, June 11 from 9:00 to 10:30 a.m.  Farmers, educators, and ag industry professionals are invited to log-on for the latest updates on the issues impact our farm economy.

The session will begin with the Farm Office Team answering questions asked over the two weeks.  Topics to be highlighted include:

  • Updates on the CARES Act Payroll Protection Program
  • Prevent Plant Update
  • Business & Industry CARES Act Program
  • EIDL Update
  • CFAP- update on beef classifications and commodity contract eligibility
  • Dicamba Court Decision Update
  • Other legal and economic issues

Plenty of time has been allotted for questions and answers from attendees. Each office session is limited to 500 people and if you miss the on-line office hours, the session recording can be accessed at farmoffice.osu.edu the following day.  Participants can pre-register or join in on Thursday morning at  https://go.osu.edu/farmofficelive 

 

Sign up for USDA-CFAP Direct Support to Begin May 26, 2020

Ben Brown, Peggy Kirk Hall, David Marrison, Dianne Shoemaker and Barry Ward
The Ohio State University

Since the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020 and the announcement of the Coronavirus Food Assistance Program (CFAP) on April 17, 2020, producers in Ohio and across the country have been anxiously awaiting additional details on how the Coronavirus Food Assistance Program (CFAP) will provide financial assistance for losses experienced as a result of lost demand, short-term oversupply and shipping pattern disruptions caused by COVID-19.

The additional details on CFAP eligibility, payment limitations, payment rates, and enrollment timeline arrived on May 19, 2020, when the USDA issued its Final Rule for CFAP.  In this article, we explain the Final Rule in this issue of News from the Farm Office.

Click here to read the complete article

Starting Tuesday, May 26, 2020, producers can contact their local FSA office and begin to sign up for CFAP.  This bulletin serves as the authors’ interpretations of the Final Rule released by USDA, and FSA interpretation may be different.

OSU Extension and Ohio FSA will conduct a webinar in the upcoming days to outline program materials and answer questions. For information about the webinar and additional information on CFAP, please visit farmoffice.osu.edu.

Information provided on the program by USDA along with a webinar for new FSA program participants is available at farmers.gov/CFAP.

Being and Maintaining an Economically Resilient Farm

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

The word “resilience” is used often in the agricultural press.  What does this mean?  Merriam-Webster defines resilience as:

  1. The capability of a strained body to recover its size and shape after deformation caused especially by compressive stress.
  2. An ability to recover from or adjust to misfortune or change.

We often see resilience used in agriculture when discussing climate and weather.  There is documented evidence of weather changes that have impacted agriculture, and farmers have done their best to adapt to these changes.  Examples include building soil health, managed grazing, the use of cover crops, water management strategies, technology adoption, and more.

Resilience can also be used when discussing the economics of agriculture and the resulting effects.  It is no surprise to anyone in agriculture that people are strained, are experiencing stress, and are trying to adjust to new and different ways of operating.

Strategies to Be Economically Resilient

  • Mission statement

A mission statement is a short description of the fundamental reasons your business exists – its critical purpose.  The statement aligns what the business says it does, what it actually does, and what others believe it is about.  The statement reflects the underlying values, goals, and purposes of the business.

Example mission statement:

“The mission of Brown Family Farms is to produce high-quality crops in sufficient quantity and quality to provide a good standard of living for our family and employees.  We believe a farm is the perfect environment to raise a family and strive to have the farm remain a viable business for future generations.”

  • Set Goals

An acronym commonly used to describe goals is SMART.  Goals must be Specific, Measurable, Action-oriented, Realistic, and Timed to be useful management tools.  As you develop goals, it may be helpful to divide them into personal, production, and operational categories.

Goals should be:

Specific – and focus on a specific problem or need

Measurable – to have some means of tracking achievement

Action-oriented – action is the pathway to achieving goals

Realistic – aim high, but keep goals within the realm of possibility

Timed – to include a realistic completion date

  • Know Your Cost of Production

Do you know the true costs to produce every acre of a crop, every pound of milk, every ton of hay, and each pound of meat?   Are there some crops or livestock that make more money than others?  Are there some acres that could be converted to a use that provides a higher net return?  How does your farm compare with the established farm financial ratios?  An in-depth financial analysis can help answer these and other questions.

Visit the Ohio State University Extension Farm Profitability Program (https://farmprofitability.osu.edu/) for additional information or to enroll in the Benchmarking Program.

  • Postpone Major Capital Investments

Most everyone is already doing this, but it is a good idea to assess what investments are necessary, how urgent these needs are for your farm, and the cost of these investments.  Do you really need to buy a new piece of equipment?  Could you accomplish what is needed by hiring someone or renting the equipment?  If you need to make a major capital investment, consider not only the initial cost, but the associated “DIRTI 5” – Depreciation, Interest, Repairs, Taxes, and Insurance that must be accounted for after the purchase.

  • Restructure Debt

Discuss with your lender opportunities to refinance or restructure debt.  Do you have short-term liabilities that could be moved to intermediate notes to improve cash flow?

  • Evaluate Expenditures

Analyze your expenses to see where you might be able to trim costs without sacrificing production.  For example, can you reduce your seeding rates to reduce costs?  Ohio State University Extension has been conducting on-farm research to evaluate corn and soybean seeding rates.  Contact your Extension educator or review the trials reports here https://digitalag.osu.edu/efields/efields-reports.  Dairy farms will find helpful information and cost-control considerations here https://dairy.osu.edu/.

Talk with your nutritionist, agronomist, Extension educator, and other experts to evaluate inputs and expenditures.  Do you need every ingredient in your ration?  Do you need a seed variety with every available trait?

  • Reduce Family Living Expenses

The Bureau of Labor Statistics data from 2018 indicate average family living expenses equaled $61,224 annually.   A February 2019 article published by the Center for Farm Financial Management at the University of Minnesota show a family of three averages almost $64,000 annually in family living expenses before paying income taxes or making other non-farm capital purchases and investments.  Are there “extras” that are costing too much?  Evaluate what you want versus what you need as a family.

  • Consider Non-Farm Income

The current pandemic may make finding off-farm employment more difficult, but there are opportunities.  Look in the local newspaper, conduct online searches, let family and friends know you or a family member could use help finding employment.  Calculate how much you need to earn at an off-farm job.

  • Seek Opportunities to Be Entrepreneurial

 Challenging times might not seem like the opportunity to get creative and extend the current workload further, but there likely are tangential opportunities to your existing business that meet the needs of the community. Maybe that is offering storage facilities, tree trimming, bookkeeping, or other enterprises. This can reenergize someone in a time when it is easy to feel down and creates a productive diversion. Some of the best creative work in this country came from a less than opportune economic environment.

  • Don’t Be Afraid to Ask for Help

To say that operating a farm business in today’s environment is a challenge is an understatement!  There are plenty of people who want and are available to help you sort through the complexities, answer questions, and provide guidance to help you succeed.

References

Bureau of Labor Statistics, Consumer Expenditures – 2018,  https://www.bls.gov/news.release/cesan.nr0.htm

Characteristics of Financially Resilient Farms, University of Nebraska, https://cropwatch.unl.edu/2018/characteristics-financially-resilient-farms

Developing Goals for the Agricultural Business, Ohio State University Extension, https://ohioline.osu.edu/factsheet/anr-45

Family Living Expenses Add Up, Center for Farm Financial Management, University of Minnesota, https://finpack.umn.edu/family-living-expenses-add-up/

Whole Farm Planning Model, Ohio State University Extension, https://ohioline.osu.edu/factsheet/anr-52

Farmers and 1099 filers might qualify for new COVID-19 unemployment benefits program

by: Peggy Kirk Hall

Farmers aren’t traditionally eligible for unemployment benefits, but that won’t be the case when Ohio’s newest unemployment program opens.   We’ve been keeping an eye out for the opening of the Pandemic Unemployment Assistance (PUA) program, which will provide unemployment benefits to persons affected by COVID-19.  The program is targeted to persons who are not eligible for regular unemployment benefits, such as self-employed and 1099 filers.   PUA is yet another economic assistance program generated by the Coronavirus Aid, Relief and Economic Security (CARES) Act recently passed by Congress.

PUA will provide regular unemployment benefit amounts to qualifying individuals, plus an additional $600 per week for the period of March 29 to July 25, 2020.   Qualification doesn’t include a minimum income requirement, but a person must not be eligible for Ohio’s regular unemployment benefits and must not be currently receiving vacation, sick or other paid leave.  The applicant must also be unable to work due to one of the following situations:

  • The applicant has been diagnosed with COVID-19 or has symptoms and is seeking medical diagnosis;
  • A member of the applicant’s household has been diagnosed with COVID-19;
  • The applicant is providing care for a family or household member who has been diagnosed with COVID-19;
  • The applicant cannot work due to caring for a child whose school or other facility has closed due to COVID-19;
  • The applicant has become the primary support for a household because the head of the household has died due to COVID-19;
  • The applicant has quit his or her job, was laid off, or could not begin a new job as a direct result of COVID-19;
  • The applicant’s place of employment is closed because of COVID-19.

Applications should open by mid-May, on the Ohio Department of Job and Family Services website.  Self-employed individuals will have to submit proof of employment, such as earnings statements that reflect profit and loss, payroll deposits, or a 2019 tax return.  The unemployment benefits will be retroactive to the date of eligibility and will last for no more than 39 weeks, up to December 26, 2020.  PUA may also provide an additional 13 weeks of benefits for those who’ve exhausted regular unemployment benefits.  To learn more or apply for PUA, visit https://unemploymenthelp.ohio.gov/expandedeligibility/.

Farm Office Live Session Slated for Thursday, May 14 from 9:00 to 10:30 a.m.

OSU Extension is pleased to be offering the a “Farm Office Live” session on Thursday morning , May 14 from 9:00 to 10:30 a.m.  Farmers, educators, and ag industry professionals are invited to log-on for the latest updates on the issues impact our farm economy.

The session will begin with the Farm Office Team answering questions asked over the ten days.  Topics to be highlighted include:

  • Updates on the CARES Act, Payroll Protection Program, Economic Injury Disaster Loan (EIDL), and Coronavirus Food Assistance Program (CFAP) Update
  • Corn and soybean budgets
  • Supply and demand balance sheets
  • Other legal and economic issues

Plenty of time has been allotted for questions and answers from attendees. Each office session is limited to 500 people and if you miss the on-line office hours, the session recording can be accessed at farmoffice.osu.edu the following day.  Participants can pre-register or join in on Thursday morning at  https://go.osu.edu/farmofficelive 

Registration Now Open for May 6 Annie’s Virtual Reunion

By: Amanda Douridas, Extension Educator

Those who have participated in an Annie’s Project understand the camaraderie and friendships that are developed during the course. They also understand the value of education to improve the farm operation. Keeping those two points in mind, the Ohio Women in Ag team is hosting a virtual Annie’s Reunion on May 6 from 9-11 a.m.

The reunion will allow past participants to catch up with each other through virtual breakout rooms and further expand their education through 3 different tracts: Farm Management, Livestock and Food. The opening session will provide resources and inspiration for the unique challenges farms are facing right now. Breakout sessions include grain and livestock market updates, backyard poultry, food prep and preservation and more. Those who have not participated in an Annie’s Project are also invited to attend to learn more!

Registration is open until noon on May 5 at http://go.osu.edu/AnniesReunion. For questions, please contact Amanda Douridas at Douridas.9@osu.edu.

Those who have not had the opportunity to participate in an Annie’s Project are welcome to join us as well. Annie’s Project is a national program focused on farm management education for farm and ranch women. The course consists of 18 hours of education 5 risk areas: financial, human resources, legal, market and production. For more information, visit https://www.anniesproject.org/. Contact Gigi Neal if interested in learning about upcoming programs at neal.331@osu.edu or 513-732-7070.

Farm Office Live on Monday April 27

OSU Extension is pleased to be offering the third session of “Farm Office Live” session on Monday evening, April 27, 2020 from 8:00 to 9:30 p.m.  Farmers, educators, and ag industry professionals are invited to log-on for the latest updates on the issues impact our farm economy.

The session will begin with the Farm Office Team answering questions asked over the past week.  Topics to be highlighted include:

  • Update on the CARES Paycheck Protection Program
  • Economic Injury Disaster Loan (EIDL)
  • Coronavirus Food Assistance Program (CFAP) Update
  • Ethanol and biofuel update
  • ARC and PLC Forecasts
  • Other legal and economic issues

Plenty of time has been allotted for questions and answers from attendees. Each office session is limited to 500 people and if you miss the on-line office hours, the session recording can be accessed at farmoffice.osu.edu the following day.  Participants can pre-register or join in on Monday evening at  https://go.osu.edu/farmofficelive 

Pasture Rental Rates and the Price of Hay

by: Clifton Martin, OSU Extension Educator, Muskingum County

Originally posted to Ohio Beef Team Newsletter:

Source: https://u.osu.edu/beef/2020/04/08/pasture-rental-rates-and-the-price-of-hay/#more-8597

Rental rates and hay prices are two questions quickly asked with potential lengthy answers.  Many factors will affect market prices both over time and regionally. This is a quick discussion to look at some ballpark ranges on how pasture rental rates can be determined.

Published in 1998, OSU Bulletin 872, Maximizing Fall and Winter Grazing of Beef Cows and Stocker Cattle, presents calculations using the rent per unit of livestock on a monthly basis using the formula animal weight per 1,000 lbs x hay price per ton x pasture quality factor.

Where Pasture Quality Factors are as follows:

0.12 = 0.12 unimproved condition
0.15 = 0.15 fair to good permanent pasture
0.18 = 0.18 very good permanent pasture
0.20 = excellent meadow (grass/legume)
0.22 = lush legume pasture

The example in Bulletin 872 uses a 1,000 lb cow with 200 lb calf (1.2 animal unit months), hay price of $40/T, and pasture quality of 0.15.

Example: 1.2  X  $40  X  0.15 = $7.20 rent/head/month

This is a fairly standard calculation which attempts to adjust for forage quality and time on pasture but not the only method producers or landowners may need. It is also easy to adjust and customize based on individual conditions. More systems of calculating rental rates can be found in OSU Extension Fact Sheet FR-8, Establishing a Fair Pasture Rental Rate.

Calculating the price of hay can be moving target and it can be tough to provide a direct answer if asked. This is especially true when supply and quality appear to be low and markets are active. Rent conversations can go the same direction, but there are tools to help move everyone into the ballpark for effective conversations and help frame expectations. Ultimately, producers must know their own cost of production for profitably and landowners must know their own cost of ownership before the conversation starts.

For our purposes here, the ballpark boundaries are the above calculation and statistics from the USDA National Agricultural Statistics Service. Consider the following:

Pasture Rental rates per acre in the state of Ohio ranged from $12.50 to $66.50 across 34 reporting counties in the state of Ohio in 2019 (USDA NASS).  For the sake of discussion, if we throw out the high and low, the range is then $12.50 to $56.50 (more than one county reports $12.50).

In a ten-year time span from 2008 to 2019, the average pasture rental rate per acre in the state of Ohio varied from $25-$47. (USDA NASS)

With an animal unit of 1.2 and fair pasture quality of 0.15, rent per head per month ranges from $7.20 (hay price $40/T) to $36.00 (hay price $200/T).

The annual average price of hay for the state of Ohio from 2008 to 2019 ranged from $112 to $193 (USDA NASS).

Table 1 Presents an adaptation of the rent/head/month calculation presented in Bulletin 872 to quickly demonstrate the impact of the price of hay. Table 2 presents price ranges based on changes in the quality of the pasture. Table 3 provides examples of calculations on cow/calf, dairy, and ewe/lamb livestock. Any claims of high pasture quality and high hay quality should have supporting records to support the claim.

Table 1.

Table 2.

Table 3.

As always, there are a whole host of reasons that some of these numbers may not make sense in every situation. I often get asked what the “going rate” is for both rent or hay, and the reality is the best I can do is drop a few numbers to show what some of the boundaries are to frame a discussion. The numbers presented here are part of one approach among many and should be evaluated against other methods and opportunities.

Resources:

Maximizing Fall and Winter Grazing of Beef Cows and Stocker Cattle, Bulletin 872.  1998.  Ohio State University Extension

OSU Extension Fact Sheet FR-8, Establishing a Fair Pasture Rental Rate, 2006 ohioline.osu.edu/factsheet/FR-8

USDA NASS Statistics
Ohio Hay Price Received Historical: https://quickstats.nass.usda.gov/results/4EDA186C-D249-3292-80A3-DFF413E435F7

Ohio County Cash Rents Pastureland 2019: https://quickstats.nass.usda.gov/results/2D242713-B0F1-3ACE-91C3-79FD5A70B258

Ohio Cash Rent Pastureland 2008-2019: https://quickstats.nass.usda.gov/results/FB2CC371-EC35-317B-8302-5ECD19C0A34D

The OSU Farm Office is Open! COVID-19 and Other Hot Topics on Monday, April 6 at 8:00 p.m.

As you may know, Ohio State’s campuses and offices are closed.  But we are all working away at home, and our virtual offices are still open for business.  Starting Monday April 6th, the OSU Farm Office Team  will open our offices online and offer weekly live office hours from 8:00 to 9:30 p.m.  We’ll provide you with short updates on emerging topics and help answer your questions about the farm economy.   Each evening will start off with a quick 10-15-minute summary of select farm management topics from our experts and then we’ll open it up for questions and answers from attendees on other topics of interest.

Who’s on the Farm Office Team?  Our team features OSU experts ready to help you run your farm office:

  • Peggy Kirk Hall — agricultural law
  • Dianne Shoemaker — farm business analysis and dairy production
  • Ben Brown — agricultural economics
  • David Marrison — farm management
  • Barry Ward  — agricultural economics and tax

Each office session is limited to 500 people and if you miss our office hours, we’ll post recordings on farmoffice.osu.edu the following day.  Register at  https://go.osu.edu/farmofficelive.  We look forward to seeing you there!