AgDM newsletter article, January 2003
by Robert W. Jolly, professor, 515-294-6267, firstname.lastname@example.org and Darnell Smith, former extension economist-ag program specialist
In this article we examine changes in the financial performance and structure of a panel or group of commercial farm businesses in Iowa between January 1, 1997 and January 1, 2002. This period was a challenging one for most farm families as well as farm leaders and public officials. Specifically, farm families experienced:
Given all of these economic shocks, how have farm families in Iowa fared since 1997? The following analysis provides some insight into these critical issues.
Measuring Financial Performance
The data used in this study are obtained from 557 members of the Iowa Farm Business Association (IFBA). The panel is probably fairly representative of commercial family farm businesses.
Calendar year summaries for major commodity prices and yields during this period are shown in Table 1.
USDAís nominal and deflated net farm income (NFI) estimates for the Iowa agricultural sector from 1980-2001 are shown in Figure 1. Also shown is a trend line fit to deflated NFI between 1984 and 2000. Two facts are evident:
What isnít apparent from aggregate income data is how individual farming operations have been affected by the factors that underlie the volatility in farm income. In order to gain insight into the farm-level impacts we turn to the IFBA panel.
In this study, we divide the farmers in the IFBA panel into five equal groups (quintiles) based on their average financial performance from 1997-2001. The specific measure that we use to classify financial performance is:
ACI = NFI + DEP + OFI - FL
Where: ACI = adjusted
NFI = accrual net farm income
DEP = depreciation
OFI = off-farm income
FL = family living expenditures
For each farm in the panel, we calculate average ACI for the five-year period. We then rank the panel farms from largest to smallest ACI and divide them into five groups of approximately 111 farmers per group. Because each group or quintile consists of the same farms during each of the five years included in the study, we are able to follow changes in average financial performance and structure.
The financial measure that we have chosen to rank farm performance is a little unusual. Whereas NFI measures the profitability (and efficiency) of the farm business, ACI measures the financial capacity of the farm household. If ACI is positive, funds are available to pay income taxes, principal on term debt, replace capital assets or expand. If ACI is negative, the farm business must cover the shortfall either through asset liquidation, increased borrowing or equity infusion from family members or investors. Since we are interested in the overall financial impacts of the past five years on farm families, ACI provides a more comprehensive performance measure than does NFI.
Several descriptive characteristics of farms, as of 2001, are shown in Table 2.
Some key changes since 1997 are:
In Table 3 we present average beginning-year balance sheets for 2001 for each of the ACI quintiles.
Here are some key changes in asset and liability structure that have occurred over the preceding five years:
The 2001 income statements are given in Table 4.
Some important changes over the period include:
This article has examined changes in the financial performance and structure for a panel of Iowa commercial farm businesses from January 1, 1997 to January 1, 2002. Not surprisingly, the analysis provides answers to some questions - but leaves a number of others for subsequent study.
1. Despite falling commodity prices, farm equity and income were generally stabilized for most farms over the period of study. Stabilization is due, to a large extent, to direct, across-the-board subsidization by the federal government to corn and soybean production. Recovery of livestock prices from 1998 lows also contributed to the maintenance of farm income and equity however.
2. Within the panel there has been an increase in the concentration of assets, liabilities and net worth in the top two quintiles - the upper 40 percent of farms. For lenders, this change in the distribution suggests that outstanding liabilities are increasingly being controlled by larger, better capitalized operations.
3. For the most part, farms included in this study appear to have pursued expansion strategies since 1997. They have expanded their land base and increased their investment in land and intermediate assets - machinery and buildings. We also observe a net increase in debt for all farms in the study. At the same time, they have shifted their enterprise mix in favor of cash grain production and away from livestock. This suggests that farms in this panel have positioned themselves to capture farm program payments.
4. What isnít clear from this analysis is whether or not the farms in this study are better positioned for a very plausible economic environment that would include reduced federal outlays, increased environmental oversight and heightened international competition in commodity markets. For example, the observed increase in land and machinery investments may be the result of farmersí expectations that subsidies would indefinitely continue at or near current levels. Alternatively, farmers may be viewing the subsidies as windfalls and are investing funds in capital assets in anticipation of a period of reduced incomes. This latter explanation would be somewhat more plausible if debt loads hadnít increased as well. For the top three ACI groups, however, asset value increases exceeded debt increases. We also note that, on average, farms in all five groups increased their production expenses relative to changes in revenue from all sources.
This analysis reflects conditions up to January 2, 2002. A number of significant events have occurred over the past year that are not included.
For a complete copy of
this report, for to http://www.extension.iastate.edu/Publications/FM1869.pdf
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