AgDM newsletter article, February 2000

Current and projected farm financial conditions

Bob JollyBy 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:

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

Stable Operations

Weak Operations

Severely Stressed Operations

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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