Report on Minnesota Farm Finances. April, 2010

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1 2009 Report on Minnesota Farm Finances April, 2010

2 Acknowledgements: Contributing Minnesota producers Minnesota State Colleges and Universities Farm Business Management Education Program Southwestern Minnesota Farm Business Management Association Copyright 2010, Regents of the University of Minnesota. All rights reserved. This material may not be reproduced without the written permission of the Center for Farm Financial Management, University of Minnesota. The University of Minnesota is committed to the policy that all persons shall have equal access to its programs, facilities, and employment without regard to race, color, creed, religion, national origin, sex, age, marital status, disability, public assistance status, veteran status, or sexual orientation.

3 2009 in Review FINBIN Report on Minnesota Farm Finances Dale Nordquist Center for Farm Financial Management The 2,401 Minnesota farms included in the FINBIN database represent a broad cross-section of Minnesota production agriculture. While there is no typical Minnesota farm, these farms include a large enough sample to provide a good barometer of commercial farming in Minnesota. FINBIN data is provided by farms that participate in MnSCU Farm Business Management Education programs and the Southwest Minnesota Farm Business Management Association. These farm represent about 3 percent of the farms in the state and 10% of commercial farms with total sales of over $100, Highlights! Median net farm income per farm was down 63% in The median net farm income per farm was $33,417, down from $91,242 in 2008.! Incomes were down substantially for virtually every type and size of farm.! Livestock farms of all types, on average, did not generate enough profit to support family living expenses.! While cash crop farms were more profitable than livestock farms, the median earnings of crop farms dropped by 55% to $60,101.! Dairy farm profits were down sharply. The median dairy farm earned just $5,384. The average price received for milk was $13.57 per hundredweight, a $5.89 decrease.! Hog farm profits were down sharply for the third year in a row. The median income for hog farms fell by 87% to $7,415.!! The median beef farm showed a net farm loss of $-6,534. This group includes both cattle finishing and cow-calf operations.! The average farm earned a rate of return on assets (ROA) of 3.1% compared to 10.5% in 2008 (based on adjusted cost or book valuation of assets).! Government payments per farm totaled $21,210, 3.4% of gross revenue and 39.4% of net farm income. Government payments were up due to MILC payments to dairy producers.! The average farm s net worth increased by over $59,271 while their debt to asset ratio improved slightly to 44%. Most of this increase, however, resulted from increases in asset values rather than earned net worth growth.! Profits were down in all regions of the state. The primary dairy areas of the Southeast and East Central/Northeast had the lowest incomes. The Northwest had the largest decrease in income. Farms in the Southwestern region earned the highest median farm income.! The largest farms, based on gross sales, were somewhat less profitable than medium sized farms when compared by rate of return on assets (ROA). However, this is likely more related to type of farm than size of farm.! The average family spent $52,000 on family living expenditures. The average family needed to generate $72,000 from farm and non-farm sources to cover family living, income taxes, and other ongoing non-farm expenditures. 1 Farm Business and Household Survey Data: Customized Data Summaries from ARMS, Economic Research Service, United States Department of Agriculture, 2008.

4 Highlights (MN Average) Gross revenue ($) 671, , ,654 Total expense ($) 515, , ,874 Average net farm income ($) 156, ,754 53,780 Median net farm income ($) 105,489 91,242 33,417 Rate of return on assets (%) Rate of return on equity (%) Corn yield (bu.) Soybean yield (bu.) Spring wheat yield (bu.) Corn price received (bu.) $3.01 $4.17 $3.80 Soybean price received (bu.) $7.14 $10.30 $9.84 Spring wheat price received (bu.) $5.16 $7.55 $5.81 Milk cows per dairy farm Production per cow (lbs) 21,300 21,344 21,264 Milk price received (cwt) $18.64 $19.46 $13.57 Market hog price / cwt. sold $47.88 $49.92 $45.91 Feeder pig price paid / head $46.93 $49.55 $51.25 Finished beef price / cwt. sold $89.24 $92.26 $81.49 Feeder calf price paid / cwt. $ $ $97.29 Table 1: FINBIN Farm Financial Database Highlights,

5 Profitability Figure 1: Median Net Farm Income Median net farm income was $33,417 for the 2,401 Minnesota farms that participated in Minnesota Farm Business Management programs in 2009, a major decrease from 2008 levels. Incomes were down for the second consecutive year following six years of continuous increases. In inflation adjusted dollars, these farms had he third lowest earnings in the fourteen years included in FINBIN (Figure 1). Net farm income is the farm s contribution to covering family living expenditures, income taxes, retirement savings, and reinvestment in the business. The average net farm income was $53,780, significantly higher than the median (middle) farm. This indicates that the most profitable farms were profitable enough to increase the average for all farms. Looking only at averages disguises the wide variation in profitability across farms. The median farm income for the most profitable 20% of these farms was $192,261; the median income for the least profitable 20% was a loss of $54,266. Government payments were up slightly from 2008, apparently due to MILC payments to dairy producers. The average farm received $21,210 in total government payments in 2009 compared to $19,227 in Government payments represented 3.4 % of gross farm revenue and 39.4% of net farm income. Crop related government payments in 2009 were almost exclusively direct payments, with virtually no LDP or counter-cyclical (CCP) income. 3

6 The average farm earned a 3.1% rate of return on assets (assets valued at adjusted cost basis 2 ), much lower than the 10.5% average for 2008 and the lowest of the fourteen years included in FINBIN. The average return on equity was 1.3%. Figure 2 shows the relationship between rate of return on assets (ROA) and rate of return on equity (ROE) over the past fourteen years. This relationship is a good barometer of sector profitability. The goal for any farm or for the industry as a whole is for ROE to be higher than ROA. When this is the case, borrowed capital earned more than its cost (ROA was higher than the average interest rate paid on borrowed capital). This past year was the first year since that borrowed capital has not covered its cost for these farms. Asset valuation is a major factor in measuring rates of return. Figure 2 is based on the adjusted cost or book value of assets. This provides the best picture of returns on funds actually invested by the business owners. When assets are valued at estimated market value, ROA and ROE were somewhat higher, at 4.4 % and 4.7%, respectively. This includes capitalized returns from estimated asset value changes during the year. This might be a better measure to evaluate potential future movement of investment into and out of these farms. Figure 2: Rates of Return on Assets and Equity 2 FINBIN includes assets valued at cost and at their estimated market value. Cost valuation of capital assets is based on economic depreciation which depreciates assets at a rate generally slower than allowed by tax law. The profitability measures discussed here are based on the cost value of assets. 4

7 Figure 3: Current Ratio Liquidity With profits down, these farms lost some, but not all, of the liquidity gains that they made in 2007 and The average farm in the FINBIN database had a current ratio of 1.72:1 (Figure 3) at the end of 2009 ($1.72 of current assets available to cover each dollar of current debt). While a current ratio of 2:1 is a general goal for many businesses, 1.7:1 is historically a strong position for these farms. Current ratios were reduced in 2001 by low crop yields and prices. Since then, the current ratio of these farms improved steadily until Current ratios tightened in 2009 as both the value of current assets decreased and total current liabilities increased. Current assets decreased by $22,000 while current liabilities increased by $16,000 for the average farm. Working capital to gross revenue is perhaps a better measure of liquidity in that it relates the level of liquidity to business size. Figure 4 shows the relationship between working capital (current assets - current liabilities) and gross revenue for these farms over the past fourteen years. For this group of farms, working capital was 29.1% of gross revenue at the end of In general, 25% is a goal figure for this measure so these farms, as a group, were in a strong liquidity position at the end of It is somewhat surprising that these farms were able to maintain their liquidity position in a year of dramatically reduced profits. 5

8 While the average farm in the entire group was in a strong liquidity position at the end of 2009, there was a great deal of difference within the group.! Dairy farms, on average, had only 14% of a year s gross income in working capital.! Specialized hog farms, those without significant crop sales, averaged 3% working capital to gross.! Highly leveraged farms, those with debt to asset ratios over 60%, had only 3% working capital to revenue while those with less debt (debts to assets under 40%) had over 53% of a year s gross income in working capital. Figure 4: Working Capital to Gross Revenue 6

9 Solvency The debt to asset ratios shown in Figure 5 are based on the estimated market value of all assets, farm and non-farm. Debts include deferred liabilities, an estimate of taxes payable if assets were liquidated. The debt to asset ratio for these farms improved slightly in This is counter-intuitive in a year when profits were down dramatically. The likely explanation is that producers tried to mask their lack of earned net worth growth by increasing the valuation of farm assets. Figure 5: Debt to Asset Ratio S Table 2 shows the impact of financial leverage (or debt to asset position) on financial performance for these farms. This table illustrates the increased risk faced by highly leveraged farms in low profit years. In previous high-profit years, these farms were able to leverage borrowed capital to multiply their earnings growth. In 2009 however, these farms suffered major setbacks as interest costs far exceeded the earnings of borrowed capital. Debt to Asset Ratio Under 40% Over 60% Number of farms Rate of return on assets 4.0 % 1.1 % Rate of return on equity 3.7 % % Current ratio 3.10:1 1.06:1 Working capital to revenue 53.0 % 3.2 % Term debt coverage 1.78:1 0.48:1 Table 2: Impact of Financial Leverage,

10 Figure 6: Balance Sheets at Market in Constant 2009 Dollars While debt to asset ratios have not changed a great deal in recent years, there have been major changes on the balance sheets of these Minnesota farms (Figure 6). The average farm is growing rapidly. In constant dollars, total assets have increased by more than $970,000 over this fourteen year period. Total debt increased by just over $430,000 over the same period. As a result, the average farm has gained over $530,000 of real net worth growth over the past thirteen years. This equates to 9% growth in net worth per year. Net worth increases can have two major sources those resulting from earnings, either farm or non-farm, and those resulting from asset appreciation. The producers who contribute to FINBIN FINBIN track both cost and market values of their assets so it is possible to separate these components.! Over this thirteen year period, 77% of the net worth growth was earned. Retained earnings result when farm and non-farm income exceed the amount consumed by family expenditures and income taxes.! The remaining 23% of net worth growth resulted from asset appreciation. It should be noted that the individual farms included in FINBIN change somewhat each year, as some farms exit and new farms join the contributing educational programs. 8

11 Debt Repayment Ability Term debt coverage ratio (TDCR) compares dollars available for debt repayment after family living and taxes versus scheduled debt repayment on intermediate and long-term debt. While other measures of business soundness, such as current ratio and debt to asset ratio, tend to change very little from year to year, TDCR shows much more variation. Therefore, it is probably a better indicator of year-to-year financial stress. A TDCR of 1.0 indicates that dollars generated for debt repayment exactly equaled scheduled payments. The debt repayment capacity of these farms fell dramatically in The average farm generated only $1.03 of earnings to pay each $1.00 of scheduled term debt payments (Figure 7). Most lenders are very concerned when TDCR declines below 1.1:1. Again, the averages mask the variation in repayment capacity between farms and different groups of farms. Figure 7: Term Debt Coverage Ratio! Specialized hog operations (those that generated over 70% of their income from hog sales) had a negative TDCR (-1.13), indicating that they were far from earning enough to cover any scheduled payments.! Specialized dairy operations (those that generated over 70% of their income from milk sales) earned enough to repay only 0.22 per dollar of scheduled payments.! Of the major types of farm, only cash crop farms generated a TDCR over 1.0:1, on average. Crop farms had a TDCR of 1.52:1.! When sorted based on gross sales, only midsized farms, grossing between $250,000 and $1 million, had a TDCR over 1.0:1, on average. Farms with gross sales of over $1 million had a TDCR of 0.95:1. Lenders will look at many of these farms with much closer scrutiny and will require more documentation, especially from highly leveraged livestock operations, than in past years. 9

12 Regional Profitability Farm incomes decreased in every region of the state in The dairy belt from the Southeast through the North Central/East Central region had the lowest profits, no doubt driven by low returns on dairy farms. The Northwest region had the largest dollar value decrease from Profits in the Northwest were impacted by several several factors, including lower wheat prices, poor corn yields, a long, difficult harvest season, and weak profits for livestock producers. Consistent with past years, the Southwestern region had the highest median earnings, with outstanding crop yields and less reliance on animal agriculture. Figure 8: Median Net Farm Income by Region 10

13 Figure 9: Net Farm Income by Farm Type Type of Farm 3 Profits were down for all major types of farm in Most crop farms were still relatively profitable but down from previous years. Livestock farms were much less profitable than crop farms and all suffered decreases from the previous year. Crop Farms The 1,271 crop farms in the 2009 group earned a median net farm income of $60,101, down from the previous two years when the median level exceeded $130,000. The average rate of return on assets (ROA) for crop farms (assets valued at adjusted cost basis) was 5.3%, down from 13.5% in Crop Farms Median net farm income $135,633 $132,748 $60,101 Rate of return on assets 16.5% 13.5% 5.3% Net worth change $172,550 $142,839 $97,918 Table 3: Crop Farm Returns 3 Farms were categorized based on 70% of gross receipts from the respective enterprise. For this report, hog, dairy and beef farms were categorized based on 70% of gross receipts from the livestock enterprise or a combination of that enterprise plus crop sales. 11

14 Prices received for corn, soybeans, and wheat were down from 2008 levels. Corn and wheat yields were strong while soybean yields were up slightly from the previous year. Costs per acre of of corn on cash rented land increased by 12% while soybean and spring wheat costs were relatively constant. Corn seed was up by 23%, fertilizer by 35%, and cash rent by 9%. Corn Yield ( bu.) Price received / bu. $3.01 $4.17 $3.80 Cost of production / bu. $2.83 $3.24 $3.56 Cost per acre $437 $554 $621 Soybeans Yield (bu.) Price received / bu $7.14 $10.30 $9.84 Cost of production / bu. $6.15 $7.37 $8.18 Cost per acre $265 $331 $332 Spring Wheat Yield (bu.) Price received / bu. $5.16 $7.55 $5.81 Cost of production / bu. $4.61 $5.16 $5.03 Cost per acre $235 $315 $308 Table 4: Crop Yields, Prices and Cost of Production Dairy Farms 2009 was a very tough year for the dairy farms in this group. The median net farm income for the 544 dairy farms in this group was just $5,384, down from $66,373 in The average dairy farm had a negative return on assets and lost net worth. After two years of historically high prices, the price received for milk dropped to $13.57, a 30% decrease. While costs of production were also down, producers were unable to cut costs enough to remain profitable. Feed costs decreased by 11% as did total cost per cow. Production per cow was virtually unchanged for the fourth consecutive year. Dairy Farms Median net farm income $100,530 $66,373 $5,384 Rate of return on assets 14.2% 8.1% -1.2% Net worth change $128,876 $78,645 $-7,368 Table 5: Dairy Farm Returns 12

15 Dairy Farm Highlights Number of dairy enterprises Average number of cows Production per cow (lb) 21,300 21,344 21,264 Price received / cwt $18.64 $19.46 $13.57 Cost of production / cwt $15.62 $18.09 $15.46 Cost per cow $2,961 $3,343 $2,979 Table 6: Dairy Farm Highlights Hog Farms The 119 hog farms had a second consecutive year of sharply reduced profits. The median hog farm earned a net farm income of $7,415 compared to $55,524 in This group includes all types of hog operations, including those who produce pigs and those who only finish hogs. These farms are larger, on average, than the other farm types with total assets of over $3 million compared to $1.9 million for all other types of farm. The average pig producer earned a rate of return on assets of -2.8% and lost almost $50,000 of net worth. finish Hog Farms Median net farm income $107,888 $55,524 $7,415 Rate of return on assets 7.7% 2.0% -2.8% Net worth change $117,383 $31,649 $-49,790 One of the most startling results from 2009 was the reduction in the number of hog enterprises, especially farrow-to-finish with only 17 farms included in the database. Farrow to-finish enterprises Table 7: Hog Farm Returns enterprises lost almost $14 per hundred pounds sold on a carcass weight basis. Wean-to-finish producers lost over $10 per hundredweight or almost $20 per head. Hog Farm Highlights No. farrow-to-finish ents Average number of sows Pigs weaned per sow Price received / cwt (carcass) $63.44 $66.02 $58.61 Cost of production / cwt $64.77 $68.58 $72.90 No. pig finishing enterprises Number of pigs finished 8,108 7,243 8,744 Lb of feed per lb of gain Price received / cwt (carcass) $63.51 $65.22 $58.28 Cost of production / cwt $65.08 $77.13 $69.08 Table 8: Hog Farm Highlights 13

16 Beef Farms There were 137 beef operations in this group of farms. Beef producers had the lowest median profit level of any group, with a median net farm loss of $6,534, down from a $30,921 profit the previous year. This group includes beef cow-calf operations and cattle grow/finish operations. The average beef farm earned a 0.6 % ROA in 2009 with with assets valued at adjusted cost basis. Even with low returns, the average beef producer increased their net worth by over $38,000. This increase resulted from non-farm earnings and increased valuation of assets, and not from farm profits. Beef Farms Median net farm income $30,116 $30,921-6,534 Rate of return on assets 9.3% 6.1% 0.6% Net worth change $98,586 $46,200 $38,766 Table 9: Beef Farm Returns For the second consecutive year, cow-calf operators lost over $20 per hundredweight produced. They again experienced a price decrease for their calves at the same time as their costs increased. With costs of over $127 per hundredweight produced, many of these producers will need to find more production efficiencies in order to attain profits even when prices rebound. For the second consecutive year, cattle finishers did not cover their costs of production, although losses were not as substantial as in The average producer lost $4.61 per hundredweight produced. With lower feed costs, cattle finishers were able to cut their cost of production by $13 per hundredweight compared to Unfortunately, the price received for their cattle decreased by $11 per hundredweight, and their cost cutting was not enough to bring the enterprise back to profitability. Beef Farm Highlights No. of cow-calf enterprises Number of cows Calf weaning percentage Calf sales price / cwt $ $ $98.96 Calf cost of production / cwt $ $ $ No. beef finishing enterprises Number of head finished Average daily gain Purchase cost per cwt. $ $ $97.29 Finished beef price / cwt $89.24 $92.26 $81.49 Finishing cost of production / cwt $91.97 $98.05 $84.73 Table 10: Beef Farm Highlights 14

17 Figure 10: Net Farm Income by Farm Size Size of Farm Figure 10 shows the disparity between the average earnings of the smallest farms and the largest farms in this group. Earnings were down for all sizes of farm in Three-hundredninety (390) of the 2,401 farms grossed over $1,000,000. Those largest farms netted $109,384 (Figure 10), down substantially from $340,104 in It is important to note that the largest farms often support multiple families. Farms that grossed under $500,000 supported 1.2 operators per farm, on average, while those that grossed over $1,000,000 had 1.6 operators. Consistent with previous years, the smallest farms farms had very low or negative earnings. There were 233 farms that grossed $100,000 or less in These farms include beginning farmers who may be farming with the help of parents, exiting farmers who are maintaining a connection to the farm, and part-time operators. Farms that grossed $100,000 or less lost $1,809, on average. There are exceptions, but generally farms had to gross over $100,000 before they made significant earnings. The smallest farms generally rely on non-farm sources for most of their income. The average farm that grossed less than $100,000 earned $41,413 in non-farm income in

18 While the larger farms earned higher net incomes than their smaller neighbors, they also had high investments in land, machinery and other capital. Figure 11 compares the rates of return on assets for these different size groups. Rates of return were down for all sizes of farm from 2008 levels. Returns generally increased with size for farms with gross sales under $1 million. As in 2007 and 2008, there was a downturn for farms that earned over $1 million. In 2009, this downturn probably had more to do with type of farm than farm size. Many of the largest farms, based on gross sales, are specialized livestock operations that experienced low earnings and sometimes substantial losses in As in previous years, very small farms, as a group, earned very low rates of return. Figure 11: Rate of Return on Assets by Farm Size 16

19 Family Expenses About one-third of the families included in the FINBIN database keep detailed family living records in addition to their farm financial records. The average of these farms in 2009 spent over $52,000 on family living expenses (Figure 12), an increase of 3.5% from Medical care and health insurance, when added together, were the highest single expenditure at $7,940 for the average family, followed by food and meal expenses at $7,211. $6,230 on household furnishing, non-farm vehicles, and other non-farm non-real estate capital purchases. Assuming that these capital purchases are mostly normal replacement of vehicles, furnishings, and appliances, the average family had to earn $72,400 from farm and non-farm sources to maintain their net worth. In 2009, the average farm family did barely accomplish this goal, resulting in a small increase in earned net worth or retained earnings. In addition, the average family paid income and social security taxes of $13,404, and another another Figure 12: Family Living Expense 17

20 Data Sources The Minnesota data included in FINBIN is provided by producers who are participants in farm business management education programs throughout the state. The majority of the farms included (2,306 farms) are participants in the Minnesota State Colleges and Universities (MnSCU) Farm Business Management programs s The remaining farms (95 farms) are members of the Southwest Minnesota Farm Business Management Association. More information is available on these programs at and html respectively. Sales Class Number of Farms in FINBIN Percent of Farms in FINBIN Total Minnesota Farms Percent of Minnesota Farms < $100, % 58,401 72% $100, , % 9,400 12% $250, , % 6,400 8% $500,000-1,000, % 4,430 6% > $1,000, % 2,371 3% Table 11: Size of Farms included in FINBIN vs. Minnesota Farm Population Table 11 compares the farms included in FINBIN to all Minnesota farms based on USDA- Economic Research Service data for Based on these figures, FINBIN includes 13% of Minnesota farms that grossed over $250,000 and 16% of all Minnesota farms that grossed over $1,000,000. Thus, the FINBIN database includes a substantial share of Minnesota commercial producers. Because these farms choose to be involved in these educational programs, they are not a random sample of Minnesota farms. There may be characteristics of farms that participate in these educational programs that make them different from other farms in the state. The farm financial data is processed through several levels of screening for accuracy and completeness. While it is impossible to verify accuracy of every data point, every effort is made to verify the integrity of each set of farm financial data included in the database. Bibliography FINBIN Farm Financial Database, Center For Farm Financial Management, University of Minnesota, Farm Business and Household Survey Data: Customized Data Summaries from ARMS, Featured States, Economic Research Service, United States Department of Agriculture, htm 18

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