Mixed liquidity results for Iowa farms in 2019
The accrued net farm income across commercial Iowa farms averaged $77,946 in 2019, according to the analysis of anonymized data from mid- to large-size farms collected by the Iowa Farm Business Association1. Such income level was 35% higher in real terms2 than in 2018, and equivalent to three times the income observed in 2015. However, this income was equivalent to only one-third of the 2012 income (Figure 1).
Despite the observed improvement in average income, not all Iowa farms were profitable in 2019. Figure 1 shows the farms grouped into three groups -- top, middle and bottom third. The bottom third of farms (ranked according to annual return to management) has consistently averaged negative accrued net farm income levels since 2015. In contrast, the top third group has consistently averaged incomes more than twice the size of the state average. For a more detailed analysis of the three groups, see Ag Decision Maker File C1-10.
A higher average income in 2019 did not translate into an overall improvement in financial liquidity for Iowa farms. Not only was the share of farms with vulnerable liquidity larger in December 2019 compared to a year earlier, but working capital needs were also higher. On the contrary, the shrinking share of farms with no liquidity problems saw their working capital increase in 2019.
Liquidity is analyzed using four indicators: the current ratio, the annual change in working capital per acre, the share of farms with less than $250 in working capital per acre, and the share of farms with vulnerable liquidity ratings.
The average current ratio3 for Iowa farms peaked in 2012 at 7.08. It has since declined to 2.77 in 2017, increased to 3.14 in 2018, and dropped again to 2.69 in 2019. Having 2.69 dollars in cash, inventories, and other liquid assets per each dollar of liabilities that will come due over the next twelve months might be considered a strong liquidity position for the average farm. However it is important to note that this level is the lowest observed since December 2001. As illustrated in Figure 2, current or short-term liabilities increased by 8% or $20,000 in 2019, to $274,088. That increase was less pronounced than the 12% or $81,256 increase in total liabilities between December 2018 and December 2019.
A major drawback of comparing financial indicators across all farms in the sample through time is the variability of the sample size and its composition across years. In order to partially address this issue, Figure 3 illustrates changes in working capital per acre between the first of the year and December 31st for the same set of farms at those two points in time. In 2019, the average change in working capital per acre among the 401 farms with detailed balance sheets at both points in time was -$18. This loss was similar to the one observed in 2017. However, it must be noted that the sample size became smaller through time, from 565 farms in 2015 to 401 in 2019. The next section shows similar results when the number and composition of farms in the sample is kept unchanged through the years.
Figure 4 shows the annual share of farms with working capital per acre in four different groups -- below zero, between zero and $250, between $250 and $500, and beyond $500, for each December since 2014. This is an attempt to understand the actual distribution of liquidity across farms, rather than measuring it for the state-average farm. The share of farms with negative working capital increased almost uninterruptedly from 10% in December 2014 to 17% in December 2019, while the share of farms with working capital below $250 per acre increased from 23% to 34% over the same period.
Based on their current ratio (CR) in December of each year, the sample farms were assigned a liquidity rating of vulnerable, normal, or strong. According to the Farm Financial Scorecard4, a current ratio above 2 indicates a strong liquidity position; a ratio below 1.3 indicates a vulnerable liquidity position, and a ratio between 1.3 and 2 is normal and indicates that liquidity should be kept under close watch5. To avoid outliers, only farms with current ratios between 0 and 50 were selected. Given the large number of farms in the sample with no short-term debt, a fourth category is shown in Figure 5 along with the three liquidity categories. In December 2014, there were 4.2 farms with strong liquidity or no current liabilities per each farm with vulnerable liquidity (70.8% vs. 16.8% of the sample, respectively). Five years later, in December that ratio declined to 2.1, given the increase in the share of farms with vulnerable liquidity to 28.8% and the reduction in the share of farms with strong liquidity or no current liabilities to 61.6%.
Figure 6 shows the evolution of working capital per acre for each of the four groups of farms represented in Figure 5. In December 2019, the average working capital per acre was lower in nominal terms (not adjusting for inflation) than five years earlier. Farms with vulnerable liquidity experienced the largest drop in working capital per acre between December 2018 and December 2019, averaging -$72. The declining number of farms with no current liabilities and farms with normal liquidity experienced improvements in average working capital per acre over the same period.
Liquidity analysis for selected farms
The declining number of farms in our sample through the years and the changing composition of the annual samples might drive some of the results presented in the previous section. In what follows, the analysis is limited to a subset of 348 farms with detailed balance sheet records across the most recent three years; and we interpret the data from January 1, 2017, as data from December 31, 2016.
Figure 7 highlights the growth in the share of farms with vulnerable liquidity from 23.9% in 2016 to 27.9% in 2019, and the decline in the share of farms with strong liquidity from 28.4% to 24.7% over the same period. Note that while the percentages of farms in each category differ across Figures 5 and 7, the qualitative results derived from them are similar.
Between December 2016 and December 2019, working capital per acre among the growing group of farms with vulnerable liquidity declined, on average, by $15.50 per year. The average working capital per acre for the other three groups improved over the same period (Figure 8). Taken together, Figures 7 and 8 are indicative of a growing proportion of farms with increasing needs for short-term financing.
On average, the 348 selected farms lost $19.50 in working capital per acre in 2017, gained $20.20 in 2018, and lost $30.70 in 2019.
This article explores the evolution of financial liquidity among mid- to large-size Iowa farms in 2019 against a backdrop of growing accrued net farm income. Several indicators point to a larger share of farms with increasing needs for short-term financing, with respect to 2018, but also to a declining share of farms with strengthened liquidity. Multi-year trends suggest that overall farm liquidity continues to undergo a slow but persistent erosion process.
The erosion in farm liquidity is concerning, and is a major contributor to stress among the farming community. It is important to be aware of the array of confidential and 24/7 free-of-charge resources related to legal issues, finance, stress, crisis, and disaster that are available through Iowa Concern (1-800-447-1985) and COVID Recovery Iowa (1-844-775-WARM).
The number one anchor of farm financials through this long-term erosion of liquidity has been the equity held in farmland and machinery that serve as the basis for second mortgages, restructured loans, sale-leaseback agreements, and asset liquidations. Increased flexibility in farm lending regulations and payments from government programs compensating losses due trade tensions and the coronavirus pandemic have also been key policy tools to maintain the viability of a growing share of Iowa farms. One tool to help farmers better manage liquidity is the use of a realistic cash-flow budget. Several publications by Iowa State University Extension and Outreach discuss how to develop and implement effective cash-flow budgets: AgDM Files Twelve Steps to Cash Flow Budgeting, C3-15, Understanding Cash Flow Analysis, C3-14, Cash Flow and Profitability are Not the Same, C5-213, and Farm Financial Management: 16 Ways to Stretch Cash Flow.
1 The IFBA is an independent association, managed and controlled by its farmer-members.
2 Deflated with the Consumer Price Index for All Urban Consumers (CPI-U 1982-84=100) published by the U.S. Bureau of Labor Statistics, re-expressed as 2019=100.
3 The current ratio is calculated as current assets divided by current liabilities.
4 Becker, K., Kauppila D., Rogers G., Parsons R., Nordquist D., and R. Craven. 2014. "Farm Finance Scorecard." Center for Farm Financial Management, University of Minnesota. Available online. Last accessed June 8, 2020.
5 While dairy farms or other farms that have continuous sales throughout the year can safely operate with lower current ratios, operations that concentrate sales during several periods each year (such as cash grain farms) need to strive for higher current ratios, especially near the beginning of the crop year.
Alejandro Plastina, extension economist, 515-294-6160, email@example.com