High farm liquidity cushions against low margins
The recently updated AgDM File C1-12 Liquidity Analysis of Iowa Farms explores in detail the evolution of financial liquidity among mid- and large-size Iowa farms in 2022 against a backdrop of strong but declining accrued net farm income. All indicators point to a smaller share of farms in vulnerable liquidity situations, and an overall reduced need for working capital financing in 2023, except maybe for farms with vulnerably liquidity.
The 2022 average net farm income in Iowa was the second highest on record, at $265,013. A high income continued to improve the overall financial situation of most Iowa farms. In particular, financial liquidity improved to levels not seen since 2012, and total debt declined to 2016 levels.
The average current ratio climbed to 6.87 in December 2022, becoming the second-highest ratio after the 7.08 level from 2012 (Figure 1).
Having $6.87 in cash, inventories, and other liquid assets per dollar in debt that will come due over the next twelve months means that the average farm should be able to comfortably cash flow its normal operation (not accounting for any expansion plans) in 2023, despite lower profit margins. Short-term liabilities declined by 26% in 2022, accumulating a 48% decline since their peak in 2017, while short-term assets remained stable.
Multi-year trends suggest that overall farm liquidity has continued to improve in 2022, almost fully offsetting the persistent erosion of liquidity observed between 2014 and 2020.
Alejandro Plastina, extension economist, 515-294-6160, email@example.com