AgDM newsletter article, December 1997

The future direction of agriculture

 by Elton Tophoj, Pro-Ag Solutions, 515.963.1235

We all know that farms are getting fewer and bigger.† The farm press is full of stories and statistics documenting this trend.† However, there are other trends occurring in agriculture.† We can identify some of these by asking questions.† Some of them are:

Profitability of farming

Based on farm records collected by the Iowa Farm Business Association (IFBA) *, average farm net worth increased $65,774 or 25 percent from 1990-1995 as shown in Table 1.† Both assets values and liabilities increased substantially over this time period.

Table 1.† Financial Trends Ė Average IFBA Farm (1990 to 1995)

Increase from 1990 to 1995

Amount

Percent

Assets

$142,117

51%

Feed & supplies

21,647

Equipment

21,732

Land

98,738

Liabilities

$76,343

84%

Equity

65,774

25

However, the acreage stayed the same over the period (433 acres).† So the increase in land was primarily due to increased value per acre rather than more acres.† If we concede that the livestock, feed and supplies represented real increases in value, but keep land and equipment at book values, the increase in net worth is much smaller.† What appeared as a 25 percent gain in owner's equity only increased 8 percent after holding land and equipment values constant.† In other words, in real terms the net worth of the average farmer grew at 1.7 percent per year.

Growth in sales vs. growth in expenses† -- Another point to be concerned with is the rate at which sales grew compared to expenses. IFBA records show the average value of agricultural products sold per farm increased 32 percent from 1990 to 1995.† However, production expenses per farm grew 42 percent over the same period.† So profit margins declined over this period.

Growth in sales vs. growth in debt -- While sales were growing 32 percent from 1990 to 1995, debt grew 84 percent.† It appears that farmers are increasing debt levels at a faster rate than they are increasing sales generated from the new capital.† Debt is not necessarily bad, but this could be a prescription for disaster for those who are over-leveraged.†

Replay of the 1980s?

Memories are short.† Lessons learned from the farm crises of the 1980s are only ten years old but many people don't seem to remember them.† There appear to be similarities between the present and ten years ago.† These include growing debt levels, strong competition for land, and lending based on the balance sheet instead of cash flow.

Some financial lenders believe the current growth in debt is primarily from those who are more solvent and therefore not in financial danger from an economic downturn.† However, IFBA records show the one-third of the farmers with the lowest profits have the highest percentage of debt and a negative return on equity.

Farmland values more than doubled in value from 1986 to 1996.† In accrual accounting, land would remain on the balance sheet at book value (i.e. what was paid for it).† As indicated previously, increased values on balance sheets may be deceptive to those unaware of proper accounting methods.† It creates the illusion of profits.

Full time farmers

Differences between farms based on size (value of farm production) are shown in Table 2.† Net farm income averaged $17,000 on farmers with less than $100,000 of production while those over $250,000 of sales average over $90,000 net income.† Return on equity ranged from 1 percent on the small farms to 14 percent on the large farms.† From this we must conclude that, on average, larger farms are more efficient & profitable.† However, that is not to say bigger is better.† There are examples of smaller farms competing well with larger farms.

Table 2. Value of Farm Production Ė IFBA farms (1995)

$40,000
to
$99,999

$100,00
to
$249,999

$250,000
and
above

Acres in Crops

201

398

735

Value Prod.

$70,044

$159,227

$341,976

Net Farm Income

$17,206

$43,538

$91,761

Govít. Payment as % of Net Income

33%

26%

24%

Return on Equity

1%

10%

14%

IFBA records show the average net farm income for the six years from 1990 to 1995 was $29,733.† Records also show it cost the average family of 3.5 persons $29,264 for living expenses in 1995.† What is the message?† The average farmer barely made a living from farming during these five years.† Any growth came from income earned off the farm.

The end of farm programs

A point that I donít believe many farmers have given thought to yet is that farm program payments end in 2002.† Although most farmers look forward to getting the government out of farming, I donít think they realize the impact it will have on their income.

Based on IFBA records, 26 percent of net farm income came from government payments in 1995, as shown in Table 1.† The percentage is greater (33 percent) for smaller farmers.† Even more alarming is the fact that government payments made up 45 percent of net farm income for all Iowa farms (not just IFBA farms) in 1995.† If we subtract government payments from farm income, the average farm in Iowa generated $9,834 in net farm income from operations.† Even with the $14,051 this group generated off the farm, it will probably not support a farm family.

Also, the end of government payments increases farmers risk level.† In the past, deficiency payments acted as a buffer to volatile markets.† Expect volatile markets to be the norm. Add volatile markets to the scheduled decline in income and many farmers will be in a very dangerous position financially.†

Agriculture in five years

So, where does all of this lead us?† We can draw several conclusions from the data.

* The Iowa Farm Business Association compiles records on over 2,000 farms each year.† These farms are not necessarily reflective of average Iowa farms.† They are larger, have a higher value of farm production, and have a higher net cash income than the typical Iowa farm.

 

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