Report on Minnesota Farm Finances. April, 2015

Transcription

1 2014 Report on Minnesota Farm Finances April, 2015

2 Acknowledgements: Contributing Minnesota producers Minnesota State Colleges and Universities Farm Business Management Education Program Southwestern Minnesota Farm Business Management Association Copyright 2015, 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. This project was partially funded by a National Farm Business Management and Benchmarking Grant from the USDA National Institute of Food and Agriculture.

3 2014 FINBIN Report on Minnesota Farm Finances Dale Nordquist Center for Farm Financial Management The 2,183 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 Southwestern Minnesota Farm Business Management Association. These farms represent about 3 percent of the farms in the state and 10% of commercial farms with sales of over $250, Highlights Median net farm income per farm changed very little, increasing by 3%. The median farm earned $43,129, up from $41,923 in But this small change hides major changes in the earnings of crop and livestock farms. Crop farms suffered a major decrease in earnings, while dairy, pork and beef operations all had very profitable years. Crop farm earnings dropped by 65%, a second consecutive year of major earnings decline. The median crop farm earned $17,003, down from $48,120 in Lower profits resulted from a combination of lower prices, somewhat lower than average yields, and decreased inventory values. Dairy farm earnings were up by almost 200%. The median dairy farm earned $138,027 compared to $46,795 in The average price received for milk was $24.43 per hundredweight, up from $20.36 in Profits for the median hog farm were also up sharply. The median hog farm earned $201,996, up from $79,850 in 2013.! Beef farms earnings were also improved. The median beef farm earned $40,950 in 2014, up from a very disappointing $7,717 in The average farm earned a rate of return on assets (ROA) of 3.9%, up slightly from 2.6% in 2013 (based on adjusted cost or book valuation of assets). Government payments per farm totaled $8,526, 1% of gross revenue and 9% of net farm income. Government payments were down 57% from crop support payments resulting from the new farm bill will not be received until late in The average farm s net worth increased by over $93,000, with slightly more than half of that increase resulting from earnings and the rest from increases in the estimated market value of assets. The average debt to asset ratio remained at 41%. Earnings were down in Southwestern and Northwestern Minnesota. Earnings were up in all other regions of the state where livestock production is more prevalent. Southwestern Minnesota still had the highest median earnings, at just over $58,000 per farm. Profits generally increased with farm size. The largest farms, those with sales of over $2 million, had the highest ROA at 7%. This, however, was probably more a factor of enterprise (large livestock operations) than farm size. The average family spent $64,000 on family living expenditures. Living expenses decreased by 2% over the previous year. Below are financial trends for these farms over the past three years Census of Agriculture, Preliminary Report, U.S. and State Data, National Agricultural Statistics Service, United States Department of Agriculture, 2013.

4 Highlights (MN Average) Gross revenue ($) 1,014, , ,164 Total expense ($) 712, , ,023 Average net farm income ($) 302,721 73,798 99,141 Median net farm income ($) 189,679 41,923 43,129 Rate of return on assets (%) Rate of return on equity (%) Corn yield (bu.) Soybean yield (bu.) Spring wheat yield (bu.) Corn price received (bu.) $6.08 $6.28 $4.37 Soybean price received (bu.) $13.09 $13.59 $11.67 Spring wheat price received (bu.) $8.19 $7.66 $6.33 Milk cows per dairy farm Production per cow (lbs) 22,434 22,905 23,556 Milk price received (cwt) $19.63 $20.36 $24.43 Market hog price / cwt. sold $63.33 $66.31 $75.00 Wean pig price paid / head $37.08 $43.44 $46.06 Finished beef price / cwt. sold $ $ $ Feeder calf price paid / cwt. $ $ $ Table 1: FINBIN Farm Financial Database Highlights, Profitability Crop farms and livestock farms had very different years in 2014, based on analysis of the farms that participate in Minnesota Farm Business Management programs. The median income for all farms was $43,129, up 3% over 2013 (Figure 1). But this small change in earnings for all farms hides major differences in the earnings of the diverse sectors of Minnesota s farm economy. Crop farmers, for the second consecutive year, suffered a steep decline in earnings, while many livestock producers had one of their best years ever. The major driver for the decline in profitability of crops farms was the continued decline in prices received for major commodities. The growing season did not do Minnesota producers many favors either, with much of the state producing lower than average yields, particularly for corn. 2

5 The story was different for livestock farms. At some point in 2014, milk, beef, and hog prices all hit record highs. Coupled with lower feed prices, dairy, beef and pork producers all had very profitable years. The average of all participating farms earned a net income of $99,141, substantially higher than the income for the median (middle) farm. This indicates that the most profitable farms were profitable enough to increase the average for all farms. In 2014, it was primarily the earnings of large pork and dairy farms that inflated 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 $292,015; the median income for the least profitable 20% was a loss of $-61,926. Government payments were down 57% from The average farm received $8,526 in total government payments in 2014 compared to $19,528 in Government payments represented 1% of gross farm revenue and 9% of net farm income. Payments were down due to the elimination of direct supports payments under the 2014 Farm Bill. Some crop producers who had enrolled in the ACRE program received price support payments in Eventually, many producers will receive price support payments for the 2014 cropping year under the 2014 Farm Bill but those payments will not be recognized until fall of Figure 1: Median Net Farm Income 3

6 The average farm earned a 3.9% rate of return on assets (assets valued at adjusted cost basis 2 ). Returns were up only slightly from the FINBIN record low of 2.6% in The average return on equity was also 3.9%. Figure 2 shows the relationship between rate of return on assets (ROA) and rate of return on equity (ROE) over this period. This relationship is a good barometer of sector profitability. Years when the ROE is higher than ROA are good years for agriculture. When this is the case, borrowed capital earned more than its cost (ROA was higher than the average interest rate paid on borrowed capital). In a way, we can think of 2014 as a breakeven year in that, after paying for borrowed capital, there were no additional returns to compensate for the investment of equity capital. 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 business owners. When assets are valued at estimated market value, ROA and ROE were somewhat higher, at 4.3% and 5.4%, respectively. This includes the capitalized estimated increases in asset values during the year in addition to actual farm earnings. Figure 2: Rates of Return on Assets and Equity 2 FINBIN includes assets valued at cost (book) 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 displayed here are based on the cost value of assets. 4

7 Liquidity After three very profitable years from 2010 to 2012, these Minnesota farms have suffered reductions in liquidity in each of the past two years. The average farm had a current ratio of 1:82:1 (Figure 3) at the end of 2014 ($1.82 of current assets to cover each dollar of current debt). Even with this decline, the average farm was still in a relatively strong liquidity position at the end of 2014, but another year of low earnings requiring producers to use working capital to meet financial obligations will almost certainly expose some major financial problems. In 2013, current ratios declined primarily because of the decreased value of crop inventories. In 2014, the larger factor was an increase in current liabilities, and in particular, an increase in current notes payable. Current loans increased by over $30,000 for the average farm in 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 by type of farm. All of the major Minnesota types of farm lost liquidity in 2014 by this measure. The average crop farm still had 46% of a year s gross revenue available in working capital at the end of 2014, down from a peak of 53% in However, this measure underestimates the deterioration of working capital on these farms as gross revenue has also declined over this period. In fact, participating crop farms have lost over 40% of their working capital in the past two years. Figure 3: Current Ratio 5

8 Dairy farms ended the year with only 17 cents worth of working capital per dollar of gross revenue. Dairy farms have never carried as much liquidity as other types of farms. While their working capital to gross revenue decreased slightly in 2014, their current ratio improved, indicating that the decline in working capital to gross was driven by increasing gross revenue. Yet, as dairy farms enter a year of reduced prices, their systemic lack of liquidity is a concern. With continued declines in liquidity over the past two years, there are certain types of operation that are in weaker liquidity positions and are more vulnerable to a financial downturn than the average farm: The youngest farmers, those 30 years old or younger, saw their working capital to gross decrease from 24% to 15% by the end of Highly leveraged farms, those with debt to asset ratios over 60%, saw their working capital to gross decrease from 10% to 6% in The average of the 152 highly leveraged crop farms in the group ended the year with negative 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 solvency position of these farms was unchanged in 2014 after weakening in 2103 for the first time since At 41%, including deferred liabilities, the average farm is still in a strong solvency position. Figure 5: Debt to Asset Ratio S Table 2 shows the impact of financial leverage (or debt-to-asset position) on the financial performance for these farms. This table shows the risk/reward position of highly leveraged farms. While they were actually more profitable, based on ROA, than those farms carrying less debt, their liquidity and repayment capacity positons make them very vulnerable to any kind of financial disruption. Debt to Asset Ratio Under 40% Over 60% Number of farms Rate of return on assets 4.2 % 4.8 % Rate of return on equity 4.3 % 7.1 % Current ratio 3.4:1 1.1:1 Working capital to revenue 55 % 6 % Term debt coverage 2:1 1.2:1 Table 2: Impact of Financial Leverage,

10 Figure 6: Balance Sheets at Market in Constant 2014 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 and grew again in In constant dollars, total assets have increased by over $1.8 million over this period. Total debt increased by over $700,000 over the same period. As a result, the average farm has gained over $1.1 million of real net worth over the past nineteen years. This equates to 10% growth in net worth per year. Net worth increases can have two 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 nineteen year period, 78% 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 22% 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 Capacity Debt coverage is a primary measure lenders monitor when extending credit to any business. The term debt coverage ratio (TDCR) compares dollars available for debt repayment after family living and income taxes versus scheduled debt repayment on term (non-current) debt. A TDCR of 1:1 indicates that income available for debt repayment exactly equaled scheduled payments. 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. In 2014, the average of these Minnesota farms generated a TDCR of 1.33:1, much improved from a historically low 1.02:1 in While improved, most lenders would still consider a farm with 1.3:1 debt coverage to be quite vulnerable to financial risks. Here again, looking only at the average conceals the underlying disparities across these Minnesota farms. Crop farms generated a TDCR of only 0.45: 1, meaning that the average crop producer generated less than half the amount needed to make term debt payments out of current year earnings. The rest had to come from liquidating working capital retained from previous years. Dairy and hog producers, on the other hand, generated a TDCR of over 2.5:1. Most crop producers came into the year with enough working capital to cover payments without any difficulty. But this contributed to the reduction in working capital reported by crop producers. Figure 7: Term Debt Coverage Ratio 9

12 Regional Profitability Regionally, farm incomes were up slightly in areas of the state with substantial livestock production and down in regions dominated by crop production. That generally translated to incomes up in the East and down in the West. Even though their incomes were down, producers in the Southwest region had the highest earnings for the second consecutive year. Incomes were lowest in the South Central region. Coupled with low crop prices, participating producers in the South Central region also produced their lowest corn yield since Profits were also down by 44% in the Northwest. Incomes for Red River Valley and West Central farms were reduced by a second consecutive year of low sugar beet prices. Figure 8: Median Net Farm Income by Region 10

13 Type of Farm was a year of divergence for Minnesota s crop and livestock farms. Crop farms profits were down for a second consecutive year and many crop farmers experienced losses. On the other hand, most livestock farms, whether they were dairy, pork or beef farms, had one of their most profitable years. Crop Farms The 955 crop farms in the 2014 group earned a median net farm income of only $17,003, down 65% from As Figure 3 shows, this is a huge decrease from the financial performance of these farms in the previous three years. The average crop farm earned a negative return on equity capital (Table 3). Prices for Minnesota s principal commodities continued to decline in The price of corn in January, 2014 was $4.40 per bushel. By December, corn sold for an average of Soybeans fell from $12.50 to $ The dramatic price reduction for corn and soybeans, along with corresponding reductions for other crops pushed ending inventory values down, a major reason crop farms were less profitable in The average prices received for sales of corn and soybeans by were $4.37 and $11.67 respectively, indicating that many farmers did a good job of marketing their crop. Sugar beets brought $42/ton, down from $66 two years earlier. Figure 9, Median Net Farm Income, Crop Farms 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. 4 Minnesota Ag News Monthly Prices, USDA National Agricultural Statistics Service 11

14 Crop Farms Rate of return on assets 17.1% 2.3% 0.0% Rate of return on equity 25.2% 1.3% -2.2% Working capital to gross rev. 53% 51% 46% Term debt coverage ratio 4.9:1 0.96:1 0.45:1 Net worth change $349,425 $102,460 $28,696 Table 3: Crop Farm Returns Corn yields averaged 158 bushe1s per acre, 9 bushels under the ten year average for participating farms. Soybeans averaged 43, a bushel over the ten year trend. Crops got off to a very slow start in most parts of the state with very cold and wet conditions through May and June. Minnesota had more prevent plant acres than any other state, with several South Central and Northwestern counties hit hardest. 5 The average crop farm received almost $52,000 of crop insurance income. Small grains did better under the cool temps. Spring wheat averaged 65 bushels per acre, 10 bushels over the ten year average. Production costs leveled out after climbing for several years. For corn, seed expense was up 5% but fertilizer was down 11%. Cash rent was up 6%. In total, the average cost per acre was virtually unchanged from Soybean costs increased by $16 per acre, an increase of 3%. om Corn Yield (bu.) Price received / bu. $6.08 $6.28 $4.37 Cost of production / bu. $4.52 $4.80 $4.57 Cost per acre $752 $821 $820 Soybeans Yield (bu.) Price received / bu $13.09 $13.59 $11.67 Cost of production / bu. $9.59 $11.06 $10.71 Cost per acre $430 $457 $473 Spring Wheat Yield (bu.) Price received / bu. $8.19 $7.66 $6.33 Cost of production / bu. $6.47 $5.98 $6.13 Cost per acre $385 $392 $389 Table 4: Crop Yields, Prices and Cost of Production for Major Minnesota Crops 5 The Farmer, Novermber, 2014, page

15 Dairy Farms Minnesota dairy farms had one of their most profitable years in history in After a year of reduced earnings in 2013 caused by high feed costs and the decreased value of feed inventories, dairy farmers earnings soared as they continued to ride a financial roller-coaster. Milk prices hit record levels of over $25 per hundredweight. The median net farm income for all dairy farms was $138,027, up almost 200% from The average dairy farm earned a 15.6% return on equity. Profits increased consistently with herd size. The largest herds size group, those with over 500 cows, averaged a 21% ROE. However, as in previous years, larger dairy farms had less of a financial cushion. Their liquidity position was much tighter than smaller dairies at 15% working capital to gross. The average price received for milk increased from $20.36 per hundredweight (cwt) in 2013 to $24.43 in On average, it cost $20.10 per cwt to produce milk, up from $19.94, resulting in net income of over $4.00 per cwt. Dairy producers had another factor in their favor in 2014 the high value of beef. Cull cow income increased by 28% per cow and calf sales income increased by 62%. Even though the price of feeds decreased from the previous year, feed costs per cow actually increased slightly as decreases in corn and hay were offset by increasing protein costs. Total production costs per cow increased by an average of 6%. A big part of that increase was labor cost, which increased by 13%. Figure 10, Median Net Farm Income, Dairy Farms 13

16 Dairy Farms Rate of return on assets 10.6% 3.3% 10.9% Rate of return on equity 15.6% 2.4% 15.8% Working capital to gross rev. 23% 18% 17% Term debt coverage ratio 2.5:1 1.1:1 2.5:1 Net worth change $171,543 $84,956 $211,005 Table 5: Dairy Farm Returns Milk production per cow increased by 3% to 23,556 pounds. Production per cow increased with herd size. Herds of over 500 cows averaged 26,497 pounds per cow. Herds of fewer than 100 cows averaged 19,358 pounds per cow. Large herds also had higher costs on a per cow basis, with higher feed costs and significantly higher labor costs. Costs per cow trended from $3,171 for the smallest herds (1 50 cows), up to $4,832 for those with over 500 cows. But on a per hundredweight basis, given higher production per cow, large herds produced milk at lower cost than any other herd size. Average herd size was 181 cows, up only 2% after increasing by over 30% in the previous three years. This number of dairy herds included in the database also declined by 2%. The number of herds has decreased by 134 herds since 2010, reflecting the continued retirement of dairy herds across the state as many older producers converted to cash crop production during the period of high crop prices. Over the years, organic dairy herds have typically netted higher returns per cow than conventional herds. That pattern was reversed in 2014 as organic herds netted $630 per cow while conventional herds netted $1,249 per cow. The average price received for organic milk was $31.25 per hundredweight. The record profits earned by many Minnesota dairy farms will not be repeated in Prices have already retreated under cost of production and futures prices for Class III milk remain under cost of production for the entire year. Dairy Farm Highlights Number of dairy enterprises Average number of cows Production per cow (lb) 22,434 22,905 23,556 Price received / cwt $19.63 $20.36 $24.43 Cost of production / cwt $19.20 $19.94 $20.10 Cost per cow $3,934 $4,104 $4,347 Table 6: Dairy Farm Highlights 14

17 Pork Farms The pork industry was dominated in 2014 by uncertainty related to the PED virus epidemic. With concern that pork supplies might be limited by baby pig death loss, buyers scrambled to lock in supplies and bid up the price of pork to record levels. Producers also ramped up production to try to make sure their barns stayed full. In the end, disease problems did not spread to the extent feared and pork production was down by only 2%. 6 For most Minnesota pork producers, all of that market uncertainty created a formula for strong profits. The median of the 84 participating hog producers made $201,996 from farm operations in 2014, higher than any other major farm type (Figure 11). The average hog producer earned 12.5% on equity capital (Table 7). No other sector of Minnesota s farm economy has changed as much as the pork industry over the past two decades. There are a lot less pork producers than there used to be. Those remaining tend to be larger than other farm types. When they are profitable, their profitability is magnified by the size of their operations. When they are not profitable, their losses are also magnified was a profitable year. Figure 11, Median Net Farm Income, Hog Farms 6 Hurt, Chris, Pork s Boom and Bust Price Pattern, farmdocdaily.illinois.edu, March 2,

18 Hog Farms Rate of return on assets 14.3% 3.3% 8.5% Rate of return on equity 21.1% 3.0% 12.5% Working capital to gross rev. 35% 30% 26% Term debt coverage 3.9:1 1.2:1 2.6:1 Net worth change $484,379 $102,422 $246,982 Table 7: Hog Farm Returns Farrow to finish operators made $425 on every litter farrowed in 2014, far more than they have ever made in the nineteen year FINBIN time series. The average price received was a record $104 per hundredweight carcass. With feed prices down and prices up, pig producers had a very profitable year. We noted above that participating hog producers are, on average, larger than other types of farm. That is not true of these farrowing operations. In fact, most are small compared to their peers. Therefore they are not a good barometer for industry trends. Participating wean to finish operators operate on a much larger scale. The average wean to finish farm finished over 16,000 pigs. In 2014 these operations made $33 per pig after losing $3 per head the previous year. Their price received per hundredweight carcass was $101.22, up from $88.90 in Feed costs were down 16% while the cost to purchase weaned pigs increased by only 6%, resulting in a total cost of production of $88.91 compared to $93.22 the previous year. It is easy to see the hog cycle in Figure 11 for most of the past two decades. The cycle has been disrupted by disease and highly variable feed costs in the past several years looks to be an aberration. It is impossible to know how the picture would have changed had there not been a PEDV scare. What is clear is that 2015 will not be as profitable as Producers built up their herds in 2014 to keep their barns full. Now those pigs are coming to market. Prices have already fallen to breakeven levels and futures prices suggest only limited improvement the rest of the year. s Hog Farm Highlights No. farrow-to-finish ents Average number of sows Pigs weaned per sow Price received / cwt (carcass) $94.52 $97.18 $ Cost of production / cwt $96.63 $97.49 $97.47 No. pig finishing enterprises Number of pigs finished 8,847 12,543 10,445 Price received / cwt (carcass) $84.51 $89.06 $ Cost of production / cwt $85.84 $92.58 $87.70 Table 8: Hog Farm Highlights 16

19 Beef Farms Across all previous years included in the FINBIN database, cow-calf producers had never netted more than $160 per cow. In 2014 they made over $450. In all previous years, cattle finishers had never netted more than 120 per head. In 2014, they made $400. Yet, 2014 was not the most profitable year for Minnesota beef farms in the FINBIN time series. That is because these farms rely on crop production for much of their income, and in 2014, crop returns (or losses) weighed them down. There were 171 beef operations in the farm management programs in The median beef farm earned $40,950 in 2014, up from $7,047 in 2013 (Figure 12). The average rate of return on equity was 8.7% for all beef operations (Table 9). For the fifth consecutive year, cow-calf operations produced beef calves at a profit after losses in the previous three years. In 2014, they netted $458 per cow. However, with only 68 cows per farm, the average cow-calf operator netted only $31,000 from their cattle operation. Like milk and pork, beef prices reached record highs in The average price received for beef calves was $217 per hundredweight, up from $156 in 2013 and 70% higher than the ten year average for these farms. Figure 12: Median Net Farm Income, Beef Farms 17

20 Beef Farms Rate of return on assets 11.1% 2.4% 6.2% Rate of return on equity 17.5% 0.8% 8.7% Working capital to gross rev. 38% 37% 29% Term debt coverage ratio 3.3:1 1.1:1 1.9:1 Net worth change $177,460 $55,631 $111,733 Table 9: Beef Farm Returns For the fifth consecutive year, total cost per cow increased. In 2014, costs increased by 11%. Cost increases were spread across several nonfeed items. Feed costs increased by only 2%. Including labor and management charges, it cost $131 to produce a hundred pounds of feeder calf on a live-weight basis. Cattle finishers earned large profits per head even though they had to pay record high costs to purchase feeder cattle. They responded to high beef prices by finishing 40% more cattle than they had in each of the past two years. The average price received for market weight cattle was $150.60, up from $ However, the price paid for feeder cattle increased from $ to $ As beef prices increased, feed costs decreased by $165 per head, a 29% reduction. Even with lower feed costs, the cost to produce 100 pounds of beef increased to $125 per cwt, up $3, largely due to the higher cost of feeder calves. Beef production is the one bright spot in the 2015 outlook for Minnesota agriculture. Cattle supply is still restricted as the industry struggles to regain capacity lost to herd liquidations following the 2012 drought. It takes a long time to rebuild cattle inventories. And to do so, heifers have to be retained for breeding rather than going to market. Cow-calf producers should have another very profitable year in Cattle finishers, on the other hand, have to live on the margin between feeder cattle and market cattle prices. It remains to be seen if profitable margins will result in Beef Farm Highlights No. of cow-calf enterprises Number of cows Calf weaning percentage Calf sales price / cwt $ $ $ Calf cost of production / cwt $ $ $ No. beef finishing enterprises Number of head finished Average daily gain Purchase cost per cwt. $ $ $ Finished beef price / cwt $ $ $ Finishing cost of production / cwt $ $ $ Table 10: Beef Farm Highlights 18

21 Size of Farm Figure 13 shows the disparity between the average earnings of the smallest farms and the largest participating farms. While this graph shows that larger farms were far more profitable than smaller farms in 2014, this may be more due to enterprise than business size, as large hog and dairy farms, who had very strong earnings in 2014, fell into this group. Two-hundred (200) of the 2183 farms grossed over $2,000,000. The median farm in this group netted $418,976. It is important to note that the largest farms often support multiple families. Farms that grossed under $500,000 supported 1.1 operators per farm, on average, while those that grossed over $2,000,000 had 1.8 operators. Consistent with previous years, the smallest farms had very low or negative earnings. There were 195 farms that grossed $100,000 or less in These farms generally 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. The median farm in this group earned a net farm income of $1,335 in The smallest farms generally rely on non-farm sources for most of their income. The average farm that grossed under $100,000 earned over $52,000 in non-farm income in Figure 13: Net Farm Income by Farm Size 19

22 While larger farms earned higher net incomes than their smaller neighbors, they also had high investments in land, machinery and other capital. Figure 14 compares the rates of return on assets for these different size groups. Here, the results are not as consistent. The largest farms had far higher returns than any other size group, but beyond that, there is no distinct pattern. This picture is a little different than it has been in recent years. Generally, there has been a consistent, but smaller, advantage to farm size. Again, it is likely that the largest livestock operations pushed up the returns of larger farms in In fact, this pattern did not hold for crop farms. Crop farms that grossed over $2 million generated an ROA of only 0.1%. But it did hold for all livestock farms. It should be noted that the ROAs for all size groups were much lower than in the boom years of In 2012, these rates ranged from 3.1% for the smallest farms to 16.4% for the largest farms. This year, with rates of 3% and under, virtually all sizes of farms except the largest farms earned lower rates than they paid on borrowed capital. In profitable years, large farms incomes are always multiplied by volume. As might be expected, large dairy, hog and beef farms were very profitable in But size was not an advantage for crop farms, many of whom lost money on rented cropland. It is not expected that returns to scale will be as large in 2015, as per unit returns weaken in milk and pork production. Figure 14: Rate of Return on Assets by Farm Size 20

23 Family Expenses For the first time since 1998, family living expenses declined for Minnesota producers who tracked detail living expenses. Approximately one-quarter of the families included in the Minnesota FINBIN database keep detailed family living records in addition to their farm financial records. The average of these farms spent over $64,000 on family living expenses in 2014 (Figure 15), a decrease of 3% from 2013 in real dollars. Medical care and health insurance, when added together, were the highest single expenditure at $10,195, followed by food and meal expenses at $8,031. In addition, the average family paid income and social security taxes of $25,153 and another $4,795 on household furnishing, non-farm vehicles, and other non-farm, non-real-estate capital purchases. Most categories of family expense decreased somewhat from the previous year. Medical and health insurance was down 5%. Food and meals were down 4%. It appears that many families farmers responded to reduced earnings by tightening their purse strings. another Figure 15: Family Living Expense 21

24 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 (2,036) are participants in the Minnesota State Colleges and Universities (MnSCU) Farm Business Management programs. More information is available on these programs at S Another 105 farms are members of the Southwest Minnesota Farm Business Management Association. More information is available on SWMFBMA at: h/farmbusinessmanagement. Forty-two farms were contributed by other affiliated groups. Sales Class Total Minnesota Farms Number of Farms in FINBIN Percent in FINBIN < 250,000 57, % $250,001 1,000,000 11,727 1,089 9% > $1,000,000 5, % Table 11: Size of Farms included in FINBIN vs. Minnesota Farm Population FINBIN data is not survey data. Participating producers complete a comprehensive whole farm and enterprise analysis of their operation at the end of each year, with the help of a farm management educator. 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. The FINBIN database includes a substantial share of Minnesota commercial farms. Table 11 Bibliography 2012 Census of Agriculture, Preliminary Report, U.S. and State Data, United States Department of Agriculture, AC-12-A-PR, February, 2015, /Preliminary_Report/Full_Report.pdf. Farmdoc, University of Illinois, compares the farms included in FINBIN to all Minnesota farms based on preliminary data from the 2012 Census of Agriculture. Based on these figures, FINBIN includes 10% of Minnesota farms that grossed over $250,000 and a smaller percentage of smaller Minnesota farms. It must be stressed, however, that this is not a random sample of Minnesota farms. These farms choose to be involved in Farm Management programs and there may be characteristics of farms that participate in these educational programs that make them different from other farms in the state. FINBIN Farm Financial Database, Center For Farm Financial Management, University of Minnesota, Minnesota Ag News Monthly Prices, United States Department of Agriculture/National Agricultural Statistics Service, Washington, D.C. The Farmer, November,