U.S. Farm Sector Profits

Transcription

1 Financial stress Alejandro Plastina, PhD Assistant Professor, Economics Crop Advantage-Denison, IA January 26, 2018 U.S. Farm Sector Profits 1

2 Overview 1) How has the financial situation of Iowa farms changed recently? 2) What can be done to improve farm resiliency? Data Source: Iowa Farm Business Association Actively Managed Mid-size Commercial Farms Focus on Farm Management Decisions Machinery and Land recorded at COST value 2

3 Average Net Farm Income in Iowa: (accrual, nominal) $250,000 $243,072 $200,000 $150,000 $100,000 $50,000 $0 $27,927 $45,597 Source: Iowa Farm Costs and Returns. Ag Decision Maker File C1 10. Various years. Average Farm Profitability in Iowa: ROA, ROE, Operating profit margin ratio 40% 35% 30% 25% 20% 15% 10% 5% 0% Operating profit margin ratio Rate of return on farm assets Rate of return on farm equity 1.7% 1.0% Source: Iowa Farm Costs and Returns. Ag Decision Maker File C1 10. Various years. 3

4 Average Farm Liquidity & Solvency Higher better Lower better Liquidity: Current Ratio = Current Assets/Current Liabilities Solvency: Debt to Asset Ratio = Total Liabilities / Total Assets Track evolution of same set of farms through time December 31, 2014 December 31, 2015 December 31, 2016 Number of farms =273 4

5 IFBA Farms vs. Ag Census Distribution of Farms by Size (Acres), in % Distribution of Farms by Age of Principal Operator, in % a)1 to 9 b)10 to 49 c)50 to 179 d)180 to 499 e)500 to 999 f)1000 and up a)under 25 b)25 to 34 c)35 to 44 d)45 to 54 e)55 to 64 f)65 and up IFBA Census IFBA Census Farms grouped according to: 1) LIQUIDITY RATING: Current ratio > 2 2) SOLVENCY RATING Debt-to-Asset Ratio < 30% Under 1.3 < Current ratio < 2 Under 30% < DTA Ratio < 60% Current ratio < 1.3 DTA ratio > 60% Source: Farm Financial Scorecard 5

6 Financial Liquidity 31.5% +8.1% 40.7% +2.2% 42.8% Plastina, A "Financial Stress in Iowa Farms: FM 1892 R. Financial Solvency 20.5% +4% 24.5% 25.3% +0.8% Plastina, A "Financial Stress in Iowa Farms: FM 1892 R. 6

7 Classification Matrix Solvency: Total Debt to Asset Ratio Under 30% Between 30% and 60% Above 60% Liquidity: Current Ratio Over 2.0 Between 1.3 and 2.0 Below 1.3 Current Ratio = Current Assets/Current Liabilities Debt to Asset Ratio = Total Liabilities / Total Assets Dec 31, 2014 (273 farms) Percent of Farms in Each Category Solvency: Total Debt to Asset Ratio Under 30% Between 30% and 60% Above 60% Liquidity: Current Ratio Over 2.0 Between 1.3 and 2.0 Below % 12.1% 2.2% 7.0% 10.6% 3.7% 2.6% 14.3% 14.7% Plastina, A A panel study of Iowa Farm Financial Conditions: AAEA Meetings, Chicago, August 1. 7

8 Dec 31, 2014 (273 farms) Percent of Farms in Each Category Solvency: Total Debt to Asset Ratio Under 30% Between 30% and 60% Above 60% Liquidity: Current Ratio Over 2.0 Between 1.3 and 2.0 Below 1.3 Total 37.4% Plastina, A A panel study of Iowa Farm Financial Conditions: AAEA Meetings, Chicago, August 1. Dec 31, 2015 (273 farms) Percent of Farms in Each Category (Change from last year) Solvency: Total Debt to Asset Ratio Under 30% Between 30% and 60% Above 60% Liquidity: Current Ratio Over 2.0 Between 1.3 and % ( 3.7%) 6.2% ( 0.7%) 10.6% ( 1.5%) 9.2% ( 1.5%) 1.5% ( 0.7%) 2.6% ( 1.1%) Below % (0.4%) 17.2% (2.9%) 20.5% (5.9%) Plastina, A A panel study of Iowa Farm Financial Conditions: AAEA Meetings, Chicago, August 1. 8

9 Dec 31, 2015 (273 farms) Percent of Farms in Each Category Solvency: Total Debt to Asset Ratio Under 30% Normal: Between 30% and 60% Above 60% Liquidity: Current Ratio Over 2.0 Normal: Between 1.3 and 2.0 Below 1.3 Total 44.7% (+7%) Plastina, A A panel study of Iowa Farm Financial Conditions: AAEA Meetings, Chicago, August 1. Dec 31, 2016 (273 farms) Percent of Farms in Each Category (Change from last year) Liquidity: Current Ratio Over 2.0 Between 1.3 and 2.0 Below 1.3 Solvency: Total Debt to Asset Ratio Under 30% 30.8% (1.5%) 6.2% (0%) 2.9% (0%) Between 30% and 60% 10.3% ( 0.4%) 6.2% ( 2.9%) 18.3% (1.1%) Above 60% 0.7% ( 0.7%) 2.9% (0.4%) 21.6% (1.1%) Plastina, A A panel study of Iowa Farm Financial Conditions: AAEA Meetings, Chicago, August 1. 9

10 Dec 31, 2016 (273 farms) Percent of Farms in Each Category Solvency: Total Debt to Asset Ratio Under 30% Between 30% and 60% Above 60% Liquidity: Current Ratio Over 2.0 Between 1.3 and 2.0 Below 1.3 Total 46.5% (+1.8%) Plastina, A A panel study of Iowa Farm Financial Conditions: AAEA Meetings, Chicago, August 1. Changes in Working Capital per Acre 10

11 1)How has the financial situation of Iowa farms changed over the last 3 years? Increased number of vulnerable farms Big losses in Working Capital December 2016: 43% of farms with vulnerable liquidity 25% of farms with vulnerable solvency 22% of farms w/ vulnerable liq. & solvency 70% 60% 50% 40% 30% 20% 10% 0% Percent of Vulnerable Farms Dec FARMS Liq & Solv Vulnerable Only Liq Vulnerable Only Solvency Vulnerable 8% 3% 2% 10% 22% 23% 19% 8% 8% Top 20% Upper 20% to 40% 6% 19% 19% Middle 20% Lower 20% to 40% Cash Farm Income Quintiles 7% 22% 40% Lowest 20% 5% 19% 20% Average Source: A.Plastina s calculations based on IFBA data 11

12 Financial stress might affect Family living expenses / Repayment of loans Local jobs Local communities Family relations / stress Litigation If you know somebody that might be stressed, call or share: Iowa Concern Hotline:

13 2) What can be done to improve farm resiliency? A) Based on study of 527 farms in Iowa: Lower expenses per acre Re-evaluate Crop/Livestock mix Lower Interest Paid Improve Marketing (higher prices) Better Yields Secure liquidity (cash-flow) Maintain solvency (balance debt vs. assets) 2) What can be done to improve farm resiliency? B) Based on comparison of top, middle and low profit farms in Illinois: Bigger yields on higher return farms Higher prices on higher return farms Lower costs on higher return farms High return group operate more acres Soil productivity not different across groups Farms in top group have lower land costs, pay average or lower cash rents as well Source: Paulson, N. Habits of Financially Resilient Farms. Illinois Farm Economics Summit, December 18 22,

14 2) What can be done to improve farm resiliency? Managing Low to Negative Crop Margins Dr. Alejandro Plastina Assistant Professor/Extension Economist Iowa State University December 8, 2015 Pro-Ag Outlook and Management Meetings Decorah, IA 9 Strategies to manage margins Major concern: cash flow / liquidity Solvency hit, but still strong: Declining land values in Iowa Declining machinery values Long term problem strategy for 2-3 years Source: Plastina, A. Managing Low to Negative Crop Margins. December 8,

15 Strategies for 2018: 1. Protect your working capital Are all your assets productive? Can you shed some assets? Are you breaking even on rented land? Is that sustainable? Revise scale of operation and fixed costs over next 2-3 years. Manage taxes: visit with Tax Advisor (Carry back Operating Losses to obtain tax refunds?) Strategies for 2018: 2. Avoid cash shortages Project your cash flow needs Use various yield-price combinations to evaluate: lowest, highest, average cash need Secure operating loan/emergency loan terms Be very careful with new capital expenditures Source: File A1 20, Ag Decision Maker 15

16 Strategies for 2018: 3. Diversify Income Sources Can you add or not lose non-farm income? Consider alternative sources of revenue with your assets: custom work, snow removal, truck driving in fall & winter,??? Strategies for 2018: 4. Revise production costs Revise production plans, especially for rented land (renegotiate land rent?) Can you make changes that generate savings that offset reductions in revenue? Examples: N 20 lbs per acre? Savings $7. If yield smaller than 2 $3.50/bu, GO AHEAD! Otherwise, NO GO. Switch to seeds with fewer traits (+crop management)? Net savings $20/acre. If yield smaller than 5.7 $3.50/bu, GO AHEAD! Otherwise, NO GO. Seek volume discounts in seeds, chemicals, etc. Visit with Agronomist: update your production skills, evaluate where to cut costs 16

17 Strategies for 2018: 5. Actively Manage Risks Know your break-even prices Design a marketing plan with price and date targets and stick to it Lock-in margins whenever possible Revise Crop Insurance (no harvest price option, lower coverage level?) Revise use of forward contract + crop insurance to finance inputs Strategies for 2018: 6. Revise family living expenses Revise family living expenditures: Vacation plans House remodeling plans Truck purchase Can you afford the RV or vacation home? 17

18 Strategies for 2018: 7. Secure repayment capacity Short repayment schedules reduce cash flow vs. long repayment schedules Try to extend repayment schedules on equipment & real estate loans (low interest rates) Work a plan with your lender(s) for 2-3 years Strategies: 8. Revise Growth Strategy Depending on your growth stage: Offload unproductive assets Downsize (rented acres?) Slow down growth (do you need new paint, more acres?) Beginning farmers: do you need to own land? Align short term needs with long term growth goals 18

19 Strategies for 2018: 9. Projected ARC/PLC Payments CRAWFORD COUNTY: USDA price forecasts for 2017/18 (as of Jan 12, 2018): $3.45/bu corn, $9.37/bu soybeans Assumed yields in 2017: 180 bushels of corn, 48 bushels of soybeans ARC-CO payments in Oct 18: Corn base acres: $0 Soybean base acres: $35-$40 per base acre. PLC payments in Oct 18: (reference prices: $3.70 c; $8.40 s) Assuming base yields of 164 bu corn PLC payments in Oct 18: $27 per corn base acre $0 per soybean base acre Source: Iowa Farm Bureau Federation Farm Bill Decision Tools 19

20 More Information 1. Financial stress in Iowa farms: Iowa Farm Costs and Returns: 3. Financial Performance Measures for Iowa Farms: 4. ARC/PLC Payments by County in Iowa: Thank you for your attention! Questions? Alejandro Plastina Assistant Professor/Extension Economist (515)