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A panel study of Iowa farm financial conditions: 2000-2007

AgDM Newsletter
May 2008

This article highlights the financial performance of a panel - or group of farm businesses over several years. The data used in our analysis are obtained from the Iowa Farm Business Association (IFBA). The IFBA is an independent farm accounting association managed and controlled by its members. The full version of this report is available from ISU Extension Publications as FM 1883.

The IFBA data consists of larger farms particularly those operating more than 500 acres. The data does not represent the entire farm population but does represent the commercial farm population in Iowa. According to the most recent census, farms larger than 180 acres - those more typified by the IFBA data – made up approximately 50 percent of all farms in Iowa and produced 83 percent of the total value of farm output.

History

Figure 1 presents nominal aggregate net farm income and farm program payment information for Iowa since 1980. Note that farm payments are included in farm income and consequently the figure shows how much of net farm income came from government farm payments of all types. Our focus in Figure 1 is 2000-2006, the period covered by this study. From 2000-2003 farm incomes were close to historical average levels. However during 2000 and 2001 most net farm income came directly from farm payments. Income declined slightly the next two years. The decline can be attributed in part to reduced government payments resulting from improving corn and soybean prices as well as declining pork prices. In 2004 income increased sharply and then fell over the next two years. In general, farm income at the end of the period significantly exceeded income at the beginning. Aggregate farm income improvement was driven, in part, by strong corn and soybean prices in 2004, significant farm program payments in 2000, 2001 and 2005, strong growth in corn yields and continuing profitability in livestock production. The impact of the current ethanol boom is not reflected in the aggregate income data however. The 2006 average prices received for corn and soybeans in Iowa were $2.13 and $5.55 respectively. The sharp ethanol-driven increase in prices began in October, 2006.

Figure 1

The story that emerges from the aggregate farm income data over the past seven years is one of above average earnings, considerable income volatility and reliance on farm program payments to provide some degree of stability during low price years. Examining farm income at the state level, however, provides little insight into the income situation for individual farm families. How income is distributed among farmers or groups of farmers is important in addressing the issues stated earlier in this paper.

Comments

In the full report, we examine the financial performance of a panel of Iowa commercial farm businesses from 2000-2007. As in previous studies, we demonstrate the wide variability in financial performance across firms facing similar economic conditions.

Within the IAFBA data set, the top 20 percent have improved their financial standing significantly over the period. The lowest 20 percent have made little financial progress. Between these extremes we see farm businesses, at varying degrees, meeting outside cash obligations and strengthening their equity position.

This study provides a snapshot of Iowa commercial farmers’ financial strengths at the beginning of the ethanol-fueled price boom and a new Farm Bill. We expect, for a few years at least, that commodity prices will continue to be strong. The grain price increases may result in cutbacks in livestock profitability depending on the growth in meat demand. Ultimately strong farm profits will be bid into land, rents and other asset values, resulting in tighter more volatile margins.

If commodity prices do remain strong, one of the unresolved questions is how the farms represented by the panel will fare. Will a rising tide lift all boats or will the range in adjusted cash income become wider? The lower 20 percent group has higher debt-to-asset ratios and is more dependent upon government payments as a source of cash income. This group may be more vulnerable to changes in the cost structure of agricultural assets. And, it is unclear how the new farm bill will influence farm income and equity growth across this rather broad spectrum of farm structures. Farm size, enterprise mix, financial condition and human capital will all contribute to the ability of farmers to adapt to changing conditions. The full version of this report is available at:  http://www.extension.iastate.edu/Publications/FM1883.pdf

References

Jolly, Robert W. and Darnell Smith. 2001. Changes in Farm Financial Performance and Structure Between 1997 and 2001:  A Case Study of Iowa Commercial Farm Businesses. FM 1869, Iowa State University Extension, Ames, Iowa.
Available at: http://www.extension.iastate.edu/Publications/FM1869.pdf

Jolly, Robert W. and Darnell Smith. 2003. Doing Good – Doing Well:  Public Policy and the Financial Fortunes of Commercial Farm Businesses in Iowa. Choices, 4th Quarter, pp. 5-10. Available at: http://www.choicesmagazine.org/2003-4/2003-4-02.htm

Hoppe, Robert A., Penni Korb, Erik J. O’Donoghue and David E. Banker. 2007. Structure and Finances of U.S. Farms:  Family Farm Report. EIB-24. U.S. Department of Agriculture, Economic Research Service. Available at: http://www.ers.usda.gov/publications/eib24/eib24.pdf

 

Robert Jolly, retired extension economist, rjolly@iastate.edu
Darnell Smith, former extension economist ag program specialist