Changes in financial indicators for a panel of Iowa farms
An examination of financial data from the Iowa Farm Business Association (FBA) revealed significant changes from January 1, 2015 to January 1, 2016 in liquidity and solvency for a panel of 316 Iowa farm businesses.
Farm operations that saw their liquidity or solvency rating fall between January 2015 and January 2016 accounted for 25.9 percent of the farms in the sample. Farms that experienced improvements in their liquidity or solvency rating over the same period accounted for 9.2 percent of the sample. The average decline in working capital across all farms in the panel between January 2015 and January 2016 amounted to -$91,658. In an environment of low commodity prices, protecting the working capital is key to the survival of the business, even if the operation has a strong balance sheet.
Table 1 summarizes the changes in categories for all farms in the sample between January 2015 and January 2016. The total number of farms that did not switch categories between January 2015 and January 2016 amounted to 204, and represented 64.6 percent of the sample.
The most common switch in category involved a lower liquidity rating while maintaining the solvency classification (16.1 percent of farms). This is a clear indication that lower commodity prices affected farm operations mostly through liquidity in 2015.
The second most common switch involved a lower solvency rating, while maintaining the liquidity classification (6.6 percent of farms). Farms in this group with vulnerable liquidity classification (12 farms), saw their farm net worth decline 23 percent on average in 2015, mostly due to operating losses and increasing debt. Farms with strong liquidity classification (9 farms), saw their net worth decline 6 percent on average in 2015, due mainly to increased debt taken to maintain liquidity levels (several farms in this group also purchased land or machinery in 2015).
The third most common switch involved improving the liquidity rating while maintaining the solvency classification (5.7 percent of farms). Only 3.2 percent of the sample experienced a simultaneous switch to lower liquidity and solvency ratings.Full details of the analysis can be found in AgDM File C1-12, Iowa Farms: From Strong to Vulnerable in a Year?
Alejandro Plastina, extension economist, 515-294-6160, firstname.lastname@example.org