Financial stress in Iowa farms
Iowa farm financial conditions have deteriorated since 2012, but average indicators of liquidity and solvency remain close to their long term levels. However, average financial measures mask the variability across farms. A new publication "Financial Stress in Iowa Farms: 2014-2016" (FM1892R) from Iowa State University Extension and Outreach tracks the evolution of financial stress in Iowa farms using a panel of financial statements collected by the Iowa Farm Business Association1. The 273 farms analyzed in this study were selected based on the availability of complete and detailed financial statements for 2014, 2015, and 2016, and are representative of medium-size commercial farms largely managed by experienced farmers.
To ensure the comparability of financial indicators across farms of different sizes, the assessment is conducted using the debt to asset ratio (total liabilities divided by total assets) as an indicator of solvency, and the current ratio (current assets divided by current liabilities) as an indicator of financial liquidity. At each point in time, each farm is assigned a solvency rating and a liquidity rating. Then, farms are grouped into different categories according to their ratings. The evolution of the farm financial situation is assessed by comparing the composition and characteristics of the different groups of farms through time.
Changes in liquidity
In December 2014, almost half (47.3 percent) of the farms had a strong liquidity rating, and less than one third (31.5 percent) of the farms had vulnerable liquidity ratings (Figure 1). By December 2015, the percent of farms with vulnerable liquidity ratings increased by 9.2 percentage points, and vulnerable farms accounted for about the same share as farms with strong liquidity ratings: 40.7 percent versus 41.4 percent. By December 2016, there were more farms with vulnerable liquidity ratings than farms with strong liquidity ratings, representing 42.9 percent versus 41.7 percent of the sample, respectively. More than two in five farms run the risk of not being able to pay off their obligations as they become due over the course of 2017.
Changes in solvency
In December 2014, only one in five farms (20.5 percent) was assigned a vulnerable solvency rating (Figure 2). But a year later, almost one in four farms (24.5 percent) had a vulnerable solvency rating. By December 2016, slightly more than one in four farms was highly leveraged. In any case, by comparing Figures 1 and 2 it becomes apparent that solvency issues are much less prevalent than liquidity issues. However, it must be noted that machinery, land and other long-lived assets are valued at their cost (or book) value, and therefore do not reflect the recent decline in asset values.
The share of financially stressed farms (vulnerable liquidity or solvency ratings) increased from 38 percent in December 2014 to 47 percent in December 2016. The average loss in working capital across all farms in the sample amounted to $123 per acre in 2015 and $57 per acre in 2016, accumulating a $180 loss over the entire period. But farms with vulnerable liquidity ratings in December 2016 accumulated an average loss in working capital of $347 per acre.
Anecdotal evidence suggests that financially stressed farms are likely to have already tried a few or several strategies to improve their bottom line. So quick fixes are likely to have already been exhausted. These operations will have to reevaluate how they generate profits, by enterprise, parcel, leasing contract, and so on, to come up with a bold, encompassing strategic plan to generate a solid stream of profits over the next few years that also accounts for the need of short term financing; or otherwise play the odds of going out of business. Planning can involve some tough choices, but the sooner it is tackled, the higher are the chances of success. In order to facilitate the planning process and to provide support to the people directly or indirectly related to financially stressed farms, the article in press by Iowa State University Extension and Outreach lists the resources available free of charge to help farmers with their farm financial planning. For other farm financial resources, see the Ag Decision Maker website.
1 The Iowa Farm Business Association (IFBA) is an independent farm business management association, managed and controlled by its members. Because the IFBA data come from actual accounting records, they are generally more accurate and consistent than data obtained from cross-sectional surveys. However, because the data are not obtained using survey sampling methods, they may not be fully representative of the Iowa farm population.
Alejandro Plastina, extension economist, 515-294-6160, firstname.lastname@example.org