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11/5/2019
1
Alejandro Plastina, Ph.D.
Assistant Professor/Extension Economist
Department of Economics
Pro-Ag Waterloo, IA – Nov 6, 2019
Farm Financial Situation and
Strategies for 2020-2025 • US Farm Finances
• Iowa Farm Finances
• Strategies for Next 5 years
Overview
• Net farm income up by 5.4%, similar to 2000-2018 average
• Crop Cash Income down by 1.7%
• Livestock Cash Income steady
• Farm expenses steady
• How comes?
Government Payments up 42.5%
Market Facilitation Program +5.8 Billions
2019 Projections for U.S. Farm Sector
Source: USDA/ERS, Farm Income and Wealth Statistics. August 30, 2019.
U.S. Net Farm Income (NFI) and Net
Cash Farm Income (NCFI)
NFI +5.4%(nominal +7.3%)
NCFI +2.9%(nominal +4.8%)
Source: USDA/ERS, Farm Income and Wealth Statistics.
August 30, 2019.
U.S. Cash Receipts for selected
Crops
2019 Total -1.7%-$3.3 billion
Soybeans:-14.3%
-$5.7 bill.
Cotton:-7.4%
-$0.6 bill.
Source: USDA/ERS, Farm Income and Wealth Statistics.
August 30, 2019.
U.S. Cash Receipts for selected Animals
& Products
Source: USDA/ERS, Farm Income and Wealth Statistics.
August 30, 2019.
2019 Total +0.5%+0.9 billions
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U.S. Farm Production Expenses
Source: USDA/ERS, Farm Income and Wealth Statistics.
August 30, 2019.
2019 Nominal Steady
Inflation-Adjusted ↓
Changes in Production Expenses:
2019F vs. 2018
Source: USDA/ERS, Farm Income and Wealth Statistics.
August 30, 2019.
Government Farm Program Payments
Source: USDA/ERS, Farm Income and Wealth Statistics.
August 30, 2019.
2019 FP Payments +42.5%
MFP +5.8 billion
U.S. Farm Sector Liquidity
0.0
0.5
1.0
1.5
2.0
2.5
3.0
020406080
100120140160180
Mill
ion
s
Working Capital ($1,000) Current Ratio
Source: USDA/ERS, Farm Income and Wealth Statistics. August 30, 2019.
U.S. Farm Sector Assets
Source: USDA/ERS, Farm Income and Wealth Statistics.
August 30, 2019.
U.S. Farm Sector Liabilities
Source: USDA/ERS, Farm Income and Wealth Statistics.
August 30, 2019.
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U.S. Farm Sector Solvency
Source: USDA/ERS, Farm Income and Wealth Statistics.
August 30, 2019.
• Data from Iowa Farm Business Association
• Mid-size commercial farms
• Most recent data from December 2018
Financial Situation of Iowa Farms
$58,832 $86,480
$0
$50,000
$100,000
$150,000
$200,000
$250,000
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
201
8
NFI Accrual
NFI Cash
Net Farm Income in Iowa
Cash and Accrual (nominal)
Source: Iowa Farm Costs and Returns. Ag Decision Maker File C1-10. Various years.
NFI Accrual = NFI Cash – Economic Depreciation + Changes in Inventories
Iowa Farms: Profitability
2.2%1.4%0%
5%
10%
15%
20%
25%
30%
35%
Operating Profit Margin Rate of Return on Assets Rate of Return on Equity
Source: Iowa Farm Costs and Returns. Ag Decision Maker File C1-10. Various years.
Iowa Farms: Liquidity and Solvency
Source: Plastina, A. 2019. “Farm liquidity slightly up, but still subdued.” AgDM Newsletter Vol. 23, No. 12.
December 2018 : • Liquidity slightly up• Liabilities slightly down
0
2
4
6
8
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Working Capital Current Ratio
Iowa Farms: Liquidity
Source: Iowa Farm Costs and Returns. Ag Decision Maker File C1-10. Various years.
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31.3 40.2 44.4 44.9 43.9
22.9 21.0 14.5
21.5 22.4
45.8 38.8 41.1 33.6 33.6
2014 2015 2016 2017 2018
Percent of Farms by Liquidity Status
Strong (CR>2)
Normal (1.3<CR≤2.0)
Vulnerable (CR≤1.3)
Iowa Farms by Liquidity Status (N=214)
Source: Plastina, A. 2019. “Farm liquidity slightly up, but still subdued.” AgDMNewsletter Vol. 23, No. 12.
Cumulative Working Capital Burn Rate per acre since 2014,
by Liquidity Status in 2018
-$189.04
-$276.65
-$306.60
-$286.66
-$139
-$215-$237
-$189
-$350
-$300
-$250
-$200
-$150
-$100
-$50
$0
2015 2016 2017 2018
Vulnerable (CR≤1.3) Normal (1.3<CR≤2.0) Strong (CR>2) All Farms
Based on Plastina, A. 2019. “Farm liquidity slightly up, but still subdued.” AgDM Newsletter 23 (12).
0%
5%
10%
15%
20%
25%
30%
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Net Worth per Acre ($ nominal) Debt-to-Asset Ratio
Iowa Farms: Solvency
(Land & Machinery at Cost Value)
Source: Iowa Farm Costs and Returns. Ag Decision Maker File C1-10. Various years.
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Corn Price, U.S. Farms
USDA FAPRI
Projected Corn, Soybean Prices
0.001.002.003.004.005.006.007.008.009.00
10.00
Soybean Price, U.S. Farms
USDA FAPRI
Sources: FAPRI-MU Bulletin #03-19. October 2019. USDA/OCE Long-Term Agricultural Projections. October 2019.
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
Slide from “Managing Tight Margins,” by Plastina & HartDecember 2015-January 2016
5-10 years!
Strategies:
1. Revise production costs• Revise production plans, especially on rented land
• Can you make changes that generate savings that offset reductions in revenue?
Visit with Agronomist. Example:
Switch to seeds with fewer traits (+crop management)? Net savings
$25/acre.
If yield smaller than 7.2 bu/acre @ $3.50/bu, GO AHEAD!
Otherwise, NO GO.
• Seek volume discounts in seeds, chemicals, etc.
• Is input supply financing with low interest rate & no discount cheaper than
traditional lending with higher interest rate & fall discount?
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Strategies:
2. Actively Manage Risks
• Know your break-even prices
• Design a marketing plan with price and date targets and stick to it
• Revise crop insurance: SCO for shallow loss?
• Revise use of forward contracts & crop insurance to finance inputs
• Lock-in margins whenever possible
Strategies:
3. Limit working capital needs
• Revise:
– share of rented land
– planting decisions in low yielding areas
– fixed costs over next 5 years
• Do you really need new machinery?
• Can you lease used equipment instead?
Strategies:
4. Diversify Income
• Add or don’t lose non-farm income
• Consider alternative sources of revenue with your assets:
custom work, snow removal, truck driving in fall & winter, ???
Strategies:
5. Revise family living expenses
• Can big-ticket items be avoided/postponed?
– Truck purchase
– House remodeling plans
– Luxury vacation plans
– Lake House
Strategies:
6. Secure repayment capacity• Work a plan with your lender(s) for 2019-2024
• Extend repayment schedules for existing loans to free up working capital
• If needed, use land equity to inject liquidity or repay short-term loans
• Take Action! if interest rates go up, or land/machinery values go down, less bang for the buck (of equity).
• Selling machinery, land can trigger capital gain taxes, depreciation recapture, reducing disposable net revenue from sale
Strategies:
7. Revise Growth Strategy• Align short term needs with long term growth goals
• Offload unproductive assets
Depending on your growth stage:
• Downsize
• Slow down growth
• Beginning farmers: wait to buy land
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1. 2019 Black Hawk Co: No ARC-CO $; PLC Corn $10.91/acre
2. Update PLC yields (AgDM File A1-35)
3. Elect ARC/PLC for 2019-2020 (AgDM File A1-33)
Strategies:8. Choose ARC/PLC Program
ARC-CO Corn ARC-CO Soybeans
Strategies:
9. Develop a Plan B
• Protect your Cash Reserves
• Secure Emergency Loan terms in advance talk to your
Lender(s)
• List Assets that could be sold to generate liquidity after taxes
consult Tax Advisor
• How much equity are you willing to lose before exiting?
• Is it time to develop a transition plan?
Summary• Farm Income and Liquidity dependent on Government
Payments
• Visit with:
Agronomist – where to cut costs?
Family – living expenses?
Lender – refinance, lower annual payments?
Tax advisor – value of assets after taxes?
Crop Insurance Agent – enterprise/basic units? SCO?
• Resources in Ag Decision Maker website
Thank you for your attention!
Questions? Comments?
Alejandro Plastina
plastina@iastate.edu
(515) 294-6160
https://www2.econ.iastate.edu/faculty/plastina/
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