AgDM newsletter article, November 2001
By Bob Jolly, Extension Economist, 515/294-6267, firstname.lastname@example.org
In this article, we examine changes in the financial performance and structure of a group of commercial farm businesses in Iowa between January 1, 1997 and January 1, 2001. This period was a challenging one for most farm families, 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.
The data used in this study are obtained from the members of the Iowa Farm Business Association (IFBA). The panel consisted of 633 farms. Farms included in the panel are not representative of the Iowa farm population as defined by the Census of Agriculture. However, the panel is probably more representative of commercial family farm businesses than the Census. Further, the IFBA panel data provide reliable financial and production information derived from a common farm accounting system used by all IFBA members.
Measuring financial performance
Table 1 presents calendar year summaries for major commodity prices and yields during this period. In this study, we divide the farmers in the IFBA panel into five equal groups (quintiles) based on their average financial performance from 1997-2000. The specific measure that we use to classify financial performance is:
ACI = NFI + DEP + OFI - FL
Where: ACI = adjusted cash
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 four-year period. We then rank the panel farms from largest to smallest ACI and divide them into five groups of approximately 127 farmers per group. Because each group or quintile consists of the same farms during each of the four years included in the study this allows us to follow changes in 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 four years on farm families, ACI provides a more comprehensive performance measure than does NFI.
In Table 2 we present several descriptive characteristics of farms included in each ACI group or quintile. Some key changes since 1997 are:
In Table 3 we present average beginning year balance sheets for 2001 for each of the ACI quintiles. Figure 1 shows the average net worth for each of the five ACI groups from 1997 to 2001. Note that changes in market value assets will reflect changes in both the level or amount of assets as well as market prices. Physical assets may have increased because of capital acquisition or through inheritance. The data do not permit us to identify how assets were acquired. Here are some key changes in asset and liability structure that have occurred over the preceding four years:
The 2000 income statements are given in Table 4. The time trends for net farm income and ACI for the five groups are shown in Figure 2. Some important changes in income over this period include:
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 stabilized for all five groups 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.
2. 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. Farms have positioned themselves to capture farm program payments.
3. What isn't 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 farmers' expectations that subsidies would 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 hadn't increased as well. For all but the lowest ACI group, however, asset value increases exceeded debt increases. We also note that, on average, farms increased their production expenses more than their realized increases in revenue - including the direct farm payments.
4. Finally, as of this writing, the impact of the terrorist attacks of September 11 on the U.S. and world economy and on our expectations for government are unclear. However, it does seem likely that expenditures for defense and public safety will increase sharply. Combined with a recession, it may be unlikely that agriculture can expect continuation of income support at the levels experienced over the past several years. If the level and allocation of Federal farm outlays changes, is the commercial farming sector positioned to withstand or accommodate these changes? This is an important question for farmers and policymakers alike and merit careful attention and analysis.
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