AgDM newsletter article, April 1999

The survivability and competitiveness of Iowa’s commercial farm businesses

Bob JollyBy Bob Jolly, Professor of Economics, 515.294.6267, rjolly@iastate.edu and Alan Vontalge, Livestock Economist, 515.294.6311, vontalge@iastate.edu

Last year reminded everybody involved in food and fiber production that agriculture has a downside.  Prices for all of Iowa’s major commodities, save milk, were down sharply from the previous year.  Iowa net farm income, in 1998, is estimated to be down 30 percent from a year earlier.  For producers with narrow profit margins, the percentage declines may be much greater.

Over the past decade, sectoral-level farm income has followed a boom and bust pattern with downturns lasting only a year or two before a sharp recovery.  Forecasts suggest that several years of slowly increasing nominal income seem likely.  Many farm leaders are expressing concern that struggling operations may not be able to survive until conditions improve.

Approach

The financial condition and capacity of farm businesses can only be meaningfully assessed with farm-level data.  The financial data used in this analysis are obtained from the members of the Iowa Farm Business Association (IFBA).  The data set includes complete financial information from nearly 1,200 operations.

Financial classification

In this analysis farms are classified into one of four financial groups based on their capacity to generate cash flow and their net worth.  Note that the financial classification attempts to reflect near term (one to three years) status of the business if income conditions continue at the assumed price levels.  The financial categories are defined as follows: 

Actual 1997 financial conditions

Table 1 shows the distribution of farm operations among the four classes and their financial condition and income levels using their actual 1997 beginning balance sheets and their actual 1997 incomes.  Prices and yields are shown in Table 2.

Table 1.  Balance sheet and income statement for 1997 vs. balance sheet for 1998 and projected average income statement for 1998 – 2000

Strong

Stable

Weak

Severe

Observations

Percent

1997

50%

37%

10%

3%

1998 – 2000

18

45

23

14

Financial Status

Farm Assets

1997

$784,625

$769,603

$517,073

$442,971

1998

817,657

908,230

654,326

607,807

Farm Liabilities

1997

$117,165

$217,855

$287,513

$343,226

1998

125,984

155,099

243,136

380,951

Farm Net Worth

1997

$667,459

$551,748

$229,560

$99,745

1998

691,672

753,131

411,189

226,856

Working Capital

1997

$191,269

$128,932

$50,671

$38,521

1998

232,198

181,754

110,394

50,813

Profitability and Liquidity

Gross Farm Income

1997

$360,693

$330,948

$305,733

$353,121

1998 – 2000

305,579

258,867

268,491

290,787

Farm Expenses

1997

$271,414

$273,697

$279,820

$352,877

1998 – 2000

241,857

237,136

286,909

334,004

Accrual Net Farm Income

1997

$89,279

$57,251

$25,913

$244

1998 – 2000

63,722

21,731

(18,418)

(43,217)

Accrual Net Cash Flow  1/

1997

$87,093

$45,762

$16,038

($18,760)

1998 – 2000

71,756

12,080

(29,271)

(54,822)

Ratios

Net Farm Income Ratio  2/

1997

.27

.19

.10

.07

1998 – 2000

.22

.09

(.06)

(.12)

Return on Assets  3/

1997

12%

8%

5%

3%

1998 – 2000

7

1

-6

-8

Return on Equity  4/

1997

12%

10%

12%

-15%

1998 – 2000

6

0

-10

-35

Debt to Asset Ratio  5/

1997

.14

.30

.52

.96

1998

.14

.17

.32

.73

1/  Annual net farm income + depreciation + off farm income – family living expenses.

2/  NFIR = accrual net farm income
                     gross farm revenue

3/  ROA = accrual net farm income + interest expense – unpaid family labor
                                                            total assets

4/  ROE = accrual net farm income – unpaid family labor
                                           net worth

5/  D/A = total liabilities
            total assets

Under 1997 income conditions:

In general, the financial picture that emerges from the 1997 data is a rather strong one.  Most farms are financially sound, earning acceptable incomes with excellent risk-bearing ability.  Relatively few farms are financially stressed.  Even these groups, on average show positive net worth and would have some restructuring options available to them.

Farm financial conditions with lower prices

Suppose that lower commodity prices persist over the next 1-3 years.  To examine this situation, farm businesses in the data set are reclassified using their actual 1998 balance sheets and projected income for 1998-2000.  Income projections are made from actual 1997 incomes by proportionately changing those revenue and cost items that are impacted by changes in commodity price and yield levels.   Price and yield assumptions used in this analysis are presented in Table 2.

Under 1998 financial and 1998 – 2000 projected income conditions:

Financial conditions of pork producers
Financial and income information for pork producers was examined separately.  A pork producer is defined as any farm reporting pork sales.  The projected financial condition for pork producers is significantly worse than the projected average for all farms.

Under 1998 – 2000 projected income conditions for pork producers:

Management implications

This analysis explores, in a preliminary way, the capacity of Iowa farm businesses to survive an extended period of lower prices.  We attempt to determine the size and composition of the at-risk farm population.  In addition, we want to gain some insight into the financial capacity of farm businesses to restructure and reposition themselves in an increasingly competitive and volatile environment.

At risk producers
If commodity prices remain low over the next few years, a significant segment of Iowa’s family-operated commercial farm businesses are potentially at risk (37 percent).  Their primary managerial challenge is survival.  They must manage accumulated losses and financially restructure if they are to continue.  For some, restructuring simply means refinancing and stretching out loan repayment terms.  For others, restructuring will require changes in enterprises, partial liquidation of assets, and possible debt forgiveness.  And for others, restructuring will not be feasible and they will go out of business.

Strong producers
About 20 percent of the farm businesses represented by this data set are in strong position.  Even with lower prices and diminished government subsidies, these operations remain profitable with sufficient liquidity to support expansion.  Strong farm businesses tend to be concentrated in cash grain production.  Some may have a smaller livestock enterprise in addition to cash grain.  Strong operations have significantly more off-farm income than average.  The average operator age is 45 years – a managerial time horizon of 10-20 years.  Clearly these businesses are survivable in the short run.  Financially they appear to be well positioned for the future.

Stable producers
The remaining farm businesses in the data set, nearly half, remain in stable condition.  Stable farms have significant equity – close to $800,000 on average.  But their projected return to equity under 1998-2000 conditions is close to zero.  Further, they have extremely limited liquidity from operations. 

Stable farm businesses can ride out a period of low prices without being placed in jeopardy.  However, they are clearly not well-positioned to compete.  Although they possess the financial strength to redirect their businesses, any new venture or expansion must be able to generate immediate cash.  They simply don’t have the luxury of sinking funds into a slowly developing investment. 

Finally, note that stable farms are operated, on average, by the oldest producers.  Repositioning requires an adequate managerial time horizon.  So stable businesses with older operators must seek out joint ventures, alliances, or multigeneration business arrangements that extend the life of the firm.

Table 2.  Iowa Price and Yield Assumptions (calendar year basis)

 

19971/

1998-2000 /2

Corn    

Price   ($/bu.)

$2.52

$2.15

Yield   (bu./a.)

138

138

Transition Payment ($/bu.)

$.46

$.35

Loan Deficiency Payment  ($/bu.)

0.00

0.00

Soybeans

 

 

Price ($/bu.)

$7.32

$5.50

Yield (bu./ac.)

46

46

Loan Deficiency Payment ($/bu.)

0.00

0.00

Market Hogs

 

 

Price ($/cwt.)

$54.18

$36.00

Market Steers

 

 

Price ($/cwt.)

$64.92

$63.00

Milk

 

 

Price ($/cwt.)

$13.20

$13.20

1/    Actual, Iowa average
2/   Author’s projections

 

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