Extension Communications
3614 Administrative Services Building
Ames, Iowa 50011-3614
(515) 294-9915
2/23/00
Contacts:
Robert Jolly, Economics Extension, (515) 294-6267,
rjolly@iastate.edu
Elaine Edwards, Extension Communication systems, (515)
294-5168, eedwards@iastate.edu
Financial Stress Continues For Iowa Farm Operations
AMES, Iowa - Financial stress among Iowa's commercial family farm businesses continues despite massive governmental intervention, according to an Iowa State University Extension economist.
"Declines in aggregate net farm income over recent years have had uneven impacts on financial viability across Iowa's agricultural enterprises," said Robert Jolly, ISU professor in the Department of Economics. "Financially strong farms have continued to build equity, whereas weak and stressed enterprises experienced increases in debt loads and erosions of net worth. Nearly half of Iowa's farm operations are weak or severely stressed. The financially vulnerable farm businesses have a higher concentration of younger families and livestock operations, and represent an important component in the future of Iowa's value-added agricultural industry," he said.
Jolly's 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 projected economic conditions. The second half is financially vulnerable, and these families must make changes in their farm businesses if they are to survive," he said.
Iowa net farm income fell sharply in 1998 to $2.2 billion from $3.7 billion in 1997. In 1999, farm income was projected to be approximately $2.5 billion. In both 1998 and 1999, farm income was propped up by large supplemental subsidies provided by the federal government.
"Most likely, large subsidies to agriculture will continue in 2000. Massive federal subsidies help, but cannot replace, income lost to low commodity prices," Jolly said. "Any significant improvement in income must come from factors or events not included in the forecasts--a crop disaster elsewhere or an unexpected surge in demand, for example. Relying on random events to resolve farm income problems is risky both for farmers and policymakers."
A number of factors have contributed to the decline in farm income that began in 1998. These include:
* economic problems in Asia and Russia,
* a strong U.S. dollar,
* currency devaluation in competing countries such as
Brazil,
* industry growth and increased competition in corn and
soybeans from Latin America,
* increased consolidation and coordination in the U.S.
livestock sector,
* cyclical price declines in the cattle and hog
industries,
* U.S. crop yields near trend levels the past three years,
and
* changes in U.S. farm policy.
"Iowa farmers now face two difficult and interrelated management problems: to survive a period of low prices and to make strategic decisions on how to compete in a global agricultural market," Jolly said.
Jolly examined data from members of the Iowa Farm Business Association (IFBA), a group with financial information from nearly 1,100 operations. "The reliability of the data is very good, since they are derived from summaries of formal accounting systems," Jolly said. "IFBA farms are larger than those in the Census averages. However, the data are probably more representative of Iowa's commercial family farms than the Census data."
Jolly then projected the financial status of a farm business under a range of economic conditions. Farms are classified in four financial categories: strong, stable, weak or severely stressed.
Iowa's strong farm operations comprise 10 percent of all operations. This group carries the lowest amount of debt (6.1 percent), and these farms were more concentrated in cash grain production.
Stable operations made up 40.8 percent of all businesses, and owe 28.6 percent of total farm debt. This group controls the most assets among the four groups. These farm operations are somewhat more likely to be cash grain or grain-livestock farms.
Weak operations make up 28.3 percent of the data set and owe 28.1 percent of total debt. This group is slightly more concentrated in livestock production and has relatively modest debt levels with an average debt-to-asset ratio of 28 percent. This group has negative projected income and cash flow levels and a return-on-equity of -14.6 percent.
The severely stressed operations make up 20.7 percent of the sample and owe 37.1 percent of all debt. This group on average has the lowest average net worth, approximately $233,000, and a debt-to-asset ratio of nearly 70 percent. They also pay a sharply higher proportion of total expenses in the form of rent and interest, approximately 30 percent higher than the sample average. This group is much more dependent on livestock, particularly hogs, and tends to be made up of younger families.
"Financial stress is determined, in part, by severity, but also by duration--how long reduced price conditions actually persist," Jolly said. "It is difficult to analyze the impact of duration since farmers will likely make rather complex changes in their businesses in response to financial stress."
Jolly's research suggests that price-related farm program payments simply buffer or offset price gains or declines.
"As a result, the program payments maintain an equilibrium in which roughly half of the farm businesses in the sample remain vulnerable," he said. "Only when price levels increase significantly above current levels do we see a significant reduction in farm stress.
For more information, Extension publication FM 1868, "Assessing the Financial Condition of Iowa's Commercial Farm Businesses, 1999-2001" is available on the World Wide Web at www.extension.iastate.edu/Publications/FM1868.pdf.
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