Updated June, 2021
File C1-12

Fewer Iowa Farms Struggling with Liquidity in 2021

Higher net farm incomes and lower short-term liabilities in 2020 put Iowa farms in a stronger position to cash flow their operations in 2021.

The accrued net farm income of commercial Iowa farms averaged $132,339 in 2020, according to the analysis of anonymized data from mid- to large-size farms collected by the Iowa Farm Business Association1. Such income level was 72% higher in real terms2 than in 2019, and equivalent to 5.2 times the income observed in 2015. However, this income was equivalent to less than two-thirds of the 2012 income (Figure 1).

figure 1

Despite the observed improvement in average income, not all Iowa farms were profitable in 2020. However, even the bottom third of the farms (arranged according to their annual return to management) averaged positive accrued net farm income levels in 2020 after seven consecutive years of negative returns. In contrast, the top third group has consistently averaged incomes more than twice the size of the state average, reaching $351,103 in 2020. For a more detailed analysis of the three groups, see FM1789, AgDM File C1-10: Iowa Farm Costs and Returns.

The increased income translated into an overall improvement in the financial situation of most Iowa farms. The average increase in working capital amounted to $110 per acre in 2020. However, not all farms saw their working capital increase. While the share of farms with vulnerable liquidity declined in 2020, their average working capital needs increased.

Overall Liquidity

We analyze liquidity 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 before increasing to 3.06 in 2020. Having 3.06 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. The 19% reduction in average short-term liabilities observed in 2020 resulted in improved liquidity and a 4% drop in average total liabilities (Figure 2).

figure 2

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 January 1 and December 31 for the same set of farms at those two points in time. In 2020, the average increase in working capital per acre among the 364 farms with detailed balance sheets at both points in time was $110. This gain was the largest over the period for which farm-level data are available. However, it must be noted that the sample size became smaller through time, from 565 farms in 2015 to 364 in 2020. The next section shows similar results when the number and composition of farms in the sample is kept unchanged through the years.

figure 3

In an attempt to understand the distribution of liquidity across farms, rather than focusing on the average farm, Figure 4 shows the share of farms with negative balances, between zero and $250, between $250 and $500, and beyond $500 in working capital per acre. The share of farms with negative working capital increased almost uninterruptedly from 10% in December 2014 to 17% in December 2019, and declined to 14% in 2020. Similarly, the share of farms with working capital below $250 per acre increased from 23% in December 2014 to 34% in 2019, and declined to 26% in 2020. The 8% decline in farms in the two most concerning categories was absorbed by a 2% increase in the share of farms with more than $500 in working capital per acre, and a 6% increase in the share of farms with $250-$500 in working capital per acre.

figure 4

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 null current liabilities, a fourth category is shown in Figure 5 along with the three liquidity categories6. 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, 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%. In December 2020, there were 2.9 farms with strong liquidity or no current liabilities per farm with vulnerable liquidity, driven mainly by the 6.9 percentage point decline in the share of farms with vulnerable liquidity.

figure 5

Figure 6 shows the evolution of working capital per acre for each of the four groups of farms presented in Figure 5. Despite the increase observed in 2020, the average working capital per acre in December 2020 was lower in nominal terms (not adjusting for inflation) than in December 2014: $510 vs. $683. All groups except for farms with CRs above 2 experienced a decline in their average working capital per acre between December 2019 and December 2020. Farms with no current liabilities experienced the largest drop in working capital per acre (-$34), followed by farms with vulnerable liquidity (-$18) and farms with normal liquidity (-$6). Farms with strong liquidity experienced a $30 increase in average working capital per acre over the same period.

figure 6

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 298 farms with detailed balance sheet records across the most recent three years. We interpret the data from January 1, 2018, as data from December 31, 2017.

Figure 7 highlights the growth in the share of farms with vulnerable liquidity from 26.5% in 2017 to 30.5% in 2019, followed by an abrupt decline to 21.5% in 2020, and the increase in the share of farms with strong liquidity or no current liabilities from 59.0% in 2017 to 63.7% in 2020. Note that while the percentages of farms in each category differ across Figures 5 and 7, the qualitative results derived from them are similar.

Figure 8 shows that working capital per acre increased for all groups of farms in 2020. This conclusion is different from the one supported by Figure 6, showing that the changing composition of the farm sample affects the results. The nominal weighted average working capital per acre across the four categories was $124 higher in December 2020 than in December 2019: $542 vs. $418. However, the average working capital for vulnerable farms remained negative, at -$184 per acre. Taken together, Figures 7 and 8 are indicative of a declining proportion of farms with decreasing needs for short-term financing.

figures 7 and 8


This article explores the evolution of financial liquidity among mid- and large-size Iowa farms in 2020 against a backdrop of growing net farm income. Some indicators point to a smaller share of farms with increasing needs for short-term financing with respect to 2020, and multiple indicators suggest an expanding share of farms with strengthened liquidity positions. Multi-year trends suggest that overall farm liquidity has improved in 2020, but the improvement could not offset the slow but persistent erosion of liquidity observed since 2014.

The long-term erosion of 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, or www.extension.iastate.edu/iowaconcern) and COVID Recovery Iowa (1-844-775-WARM, or https://covidrecoveryiowa.org).

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 to 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 File C1-15 Twelve Steps to Cash Flow Budgeting
AgDM File C3-14 Understanding Cash Flow Analysis
AgDM File C5-213 Cash Flow and Profitability are Not the Same, and
AgDM File C3-58 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 US Bureau of Labor Statistics, re-expressed as 2020=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 May 20, 2021.
5 While dairy farms or other farms that have continuous sales throughout the year can safely operate with lower CRs, operations that concentrate sales during several periods each year (such as cash grain farms) need to strive for higher CRs, especially near the beginning of the crop year.
6 Due to rounding, some shares might not sum to 100.00%.


Alejandro Plastina, extension economist, 515-294-6160, plastina@iastate.edu


Alejandro Plastina

extension economist
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