Chris Bruynis and Bruce Clevenger, Assistant Professors, OSU Extension
As the profit margins appear to be tightening again for the for grain producers with lower market prices, farmers and lenders are examining balance sheets to determine if there are any strategies that might improve a farm’s financial position. One of the areas that often appear to grow during times of significant cash inflows, similar to what grain farmers have experiences during the past few years, are intermediate assets. Intermediate farm assets have a useful life of more than one but less than 10 years. Examples of assets in this category include tools, vehicles, machinery, equipment and breeding livestock.
A value is placed on assets on the day the balance sheet, also called the net worth statement, is created. Assets can be valued either on a cost basis or market basis on the balance sheet. The market value is the most common approach and the method preferred by most lenders. The cost approach is a more sophisticated method but is useful for farmers and lender to distinguish between changes in net worth due to profits verses external economic forces that either grow or decline the market value of assets. Both methods may be used in the same statement showing two different estimates of net worth. This article will focus only on the market value method.
Some useful guidelines using the market approach to valuing assets include: using well-established markets to determine asset values; be realistic with price expectations (just because you paid $100,000 does not make it worth $100,000 when you want to sell it); don’t forget to subtract selling/marketing costs associated with the assets; and for depreciable assets, such as equipment, review their book value in your farm records to avoid overvaluing their market price.
Once intermediate assets have been accurately valued using the market value approach, farmers and bankers can benchmark these numbers to other farms of similar size. One source of data to use as a benchmark comes from the University of Minnesota FINBIN program. The table below is a comparison of 1,793 grain farms with the data being compiled from the years 2006 through 2008. The data is presented as a group as well as divided by farm size. This data is collected from Extension and farm management professionals working with farmers using the FINPACK software.
For this discussion, focus your attention in the table below to the total amount of intermediate assets in this data set and compare that to your intermediate farm assets. Another item to examine is the amount of intermediate liabilities compared to intermediate assets. This data set indicates that on the average for every $100,000 of intermediate assets, grain farmers have $23,000 dollar of intermediate debt with very little variation across farm size. From the table below; Average of All Farms: $620,461 intermediate assets and $138,491 intermediate liabilities; $138,491/6.20=$22,300 per $100,000 of intermediate assets.
How does your farm compare? Is your intermediate asset market valuation similar to your peers across the Midwest? Do you need to disinvest in intermediate assets, restructure debt, or change your operation in some other way? Contact your local OSU Extension Educator for assistance with these issues or to schedule a FINPACK analysis of your farm business.