Farm Financial Conditions - Bob Jolly, February 2000

AgDM newsletter article, February 2000

Current and projected farm financial conditions

By Bob Jolly, Extension Economist, 515/294-6267, rjolly@iastate.edu

This article provides an updated assessment of the financial condition of Iowa's commercial family farm businesses. It also analyses the potential vulnerability of Iowa farm operations under several possible market price levels. Finally the report examines the actual impact that reduced prices and increased farm subsidies have had on farm income and net worth.

Data set

The financial condition and capacity of farm businesses can only be meaningfully assessed with farm-level data. This report uses financial data obtained from members of the Iowa Farm Business Association (IFBA). The data set includes complete financial information from nearly 1,100 operations. The reliability of the financial data is very good, since they are derived from summaries of formal accounting systems.

However, the data set is not representative of all farms in Iowa. It is clear the IFBA farms are larger than those in the Census averages. Further, the IFBA operators are mid-career—most in the 35-55 age group. The IFBA data, however, are probably more representative of Iowa's commercial family farms than are the census averages.

Prices, yield, and policy

Price, yield, and policy variables for recent years and near term projections are presented in Table 1. The projections, based primarily on current market conditions and trends, represent one reasonable scenario out of many that might occur in the future. Projected government transition payments include only the legislated amounts. No annual supplemental payments, like those legislated in 1998 and 1999, are assumed.

Given the current volatility of agricultural markets, the 1999-2001 projections could be subject to considerable error. So, in addition to the baseline expected prices, optimistic and pessimistic scenarios are also listed. These alternative scenarios are included to provide an evaluation of how changing market conditions affect the financial status of farmers.

Table 1. Iowa Price Yield Assumptions (Calendar year basis)

				_________1999-2001 *__________
	1997	1998	1999	Baseline	Optimistic	Pessimistic
Corn
Price	$2.52	$2.13	$1.80	$1.95	$2.20	$1.70
Yield	138	145	151	145	145	145
Transition payment	$.46	$.54	$.70	$.35	$.35	$.35
Loan deficiency pymt.	-	.06	.11	-	-	.12
Soybeans
Price	$7.33	$5.85	$4.75	$4.85	$5.35	$4.50
Yield	46	48	48	48	48	48
Loan deficiency payment	-	.30	.64	.54	-	.74

Market Hogs
Price	$54.18	$34.33	$34.11	$38.00	$42.00	$32.00

Market Steers
Price	64.92	59.87	64.18	67.00	70.00	63.00

Milk
Price	13.4	14.7	13.5	13.0	14.0	12.0

* Author’s projections in consultation with Robert Wisner and John Lawrence, Department of Economics, Iowa State University, Ames, IA.

Financial categories

The financial categories used in the model, are defined as follows:

Strong. Farms in this group show adequate to excellent liquidity and acceptable solvency. Expansion may be feasible.

Stable. Farms in this group will not likely fail. However they may experience moderate cash flow problems or capital replacement may be less than levels required to remain in business long term.

Weak. Farms in this group can survive if operating changes and asset or debt restructuring occur. Farms are vulnerable to income losses or asset value declines. Note this group contains farms with large losses and high equity as well as those with positive earnings and low equity.

Severely stressed. If the assumed economic conditions continue, survival of farms in this group is unlikely.

Financial conditions

Financial balance sheets, income statements, financial ratios, and descriptive information are presented in Table 2. Income projections for 1999 for each farm are made from the actual 1998 income statement by proportionately changing those revenue and cost items that are impacted by changes in commodity price and yield levels. Operating expenses, rent, and depreciation charges are held constant. Costs of purchased feed and feeder livestock are adjusted to reflect commodity price changes. Income statement projections for the 1999-2001 period are made in the same fashion.

Table 2. Financial Conditions

	Strong	Stable	Weak	Severe
Distribution (%) (1999-2001 baseline)
Farm operations	10%	41%	28%	21%
Debt distribution	6	29	28	37

Balance Sheet (Beginning 1999)
Total farm assets	$761,917	$956,369	$612,428	$633,427
Total farm liabilities	135,452	156,825	221,820	400,217
Farm net worth	626,465	799,543	390,608	233,210
Net worth change from 1998	17,000	(3,726)	(32,103)	(82,227)
Working capital	$174,207	$160,921	$ 83,518	$11,714

Income Statement (est. 1999)
Total farm income	$302,560	$257,792	$229,333	$271,088
Total expenses	251,080	238,965	245,280	317,242
Accrual net farm income	51,480	18,827	(15,948)	(46,153)
Accrual net cash flow	66,558	15,129	(26,948)	(54,948)

Financial Ratios (est. 1999)
Return on assets	5%	1%	-8%	-9%
Return on equity	3%	-1%	-13%	-39%
Profit margin	12%	1%	-14%	-16%
Turnover ratio	48%	31%	44%	57%
Debt to asset ratio	15	.17	.28	.69
Current ratio	5.15	4.15	2.53	.97

Income Statement (projected 1999 - 2001)
Total farm income	$300,215	$249,342	$223,450	$264,811
Total expenses	251,080	238,965	245,280	317,242
Accrual net farm income	49,136	10,377	(21,830)	(52,431)
Accrual net cash flow	64,213	6,680	(32,831)	(61,225)

Descriptive Information (1998)
Total acres operated	589	627	570	657
Farm types
Cash grain	49%	35%	26%	22%
Grain-livestock	28	31	28	24
Hog	7	20	34	45
Beef	10	8	7	3
Dairy	3	2	1	1
Mixed	3	5	4	4
Operator age	47	52	47	45

Financial projection highlights (1999 – 2001 period)

Projected farm financial strength or vulnerability for the 1999 through 2001 time period is shown below. The projections are based on the baseline price and yield assumptions shown in Table 1.

Strong Operations

Make up 10 percent of the operations in the data set under the baseline assumptions.

Owe 6 percent of the total debt in the data set.

Control more than $76l,000 in assets per farm, the second highest among the four groups.

Generated more than $300,000 in gross sales, the highest among the financial classes.

Had the lowest debt levels with a debt-to-asset ratio of 15 percent.

Were projected to earn net farm income in excess of $49,000 and a net cash flow of $64,000.

Earned the highest off-farm income, more than twice the sample average.

Were more concentrated in cash grain production.

Stable Operations

Made up 41 percent of all businesses in the data set and owe 29 percent of total debt.

Control nearly $1 million in assets, the greatest among the four groups.

Have an average net worth of almost $800,000 and a return on assets under the baseline assumptions of slightly less than zero.

Are somewhat more likely to be cash grain or grain-livestock farms.

Are operated by the oldest farmers on average.

Weak Operations

Made up 28 percent of the data set and owe 28 percent of total debt.

Are the smallest of farms among the four groups in terms of assets owned and gross sales.

Have relatively modest debt levels with an average debt-to-asset ratio of 28 percent.

Are slightly more concentrated in livestock production.

Have negative projected income and cash flow levels and a return-on-equity of -14 percent.

Earn the lowest average off-farm income.

Severely Stressed Operations

Make up 21 percent of the sample under the baseline assumptions and owe 37 percent of all debt.

Are second smallest among the four groups in value of assets but generate the second highest level of sales.

Have the lowest average net worth, approximately $233,000 and a debt-to-asset ratio of nearly 70 percent.

Pay a sharply higher proportion of total expenses in the form of rent and interest (approximately 30 percent higher than the sample average).

Are much more dependent on livestock, particularly hogs.

Are operated by the youngest families.

Earn negative average net farm income $-52,000 under the baseline assumptions with a projected negative net cash flow of $-60,750. Their average return-on-equity is -46 percent.

The baseline analysis describes a commercial farm population divided into nearly equal proportions. The one half made up of strong and stable operations can survive under the assumed economic conditions. The second half is, to varying degrees, financially vulnerable and must make changes in their farm businesses if they are to survive.

Concluding comments

Financial stress among Iowa's commercial family farm businesses continues despite massive government intervention. Declines in aggregate net farm income over recent years has had uneven impacts on financial vitality across Iowa's agricultural enterprises. Financially strong farms have continued to build equity, whereas weak and stressed enterprises experienced increases in debt loads and erosion of net worth.

Although aggregate net farm income has likely stabilized, many farm businesses remain financially vulnerable under a range of prices likely to prevail over the next two or three years. Effective resolution of financial stress will clearly require managerial response as well as public policy that can deal with long term restructuring issues and excess capacity along with short-term price declines.

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Current and projected farm financial conditions

_________1999-2001 *__________

_1999-2001 *__