Farm Financial Situation: U.S. and Iowa€¦ · Strategies: 5. Revise family living expenses • Can big-ticket items be avoided/postponed? –Truck purchase –House remodeling plans

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.


August 30, 2019.

U.S. Cash Receipts for selected Animals

& Products


August 30, 2019.

2019 Total +0.5%+0.9 billions

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U.S. Farm Production Expenses


August 30, 2019.

2019 Nominal Steady

Inflation-Adjusted ↓

Changes in Production Expenses:

2019F vs. 2018


August 30, 2019.

Government Farm Program Payments


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


August 30, 2019.

U.S. Farm Sector Liabilities


August 30, 2019.

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U.S. Farm Sector Solvency


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


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


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4

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)


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

[email protected]

(515) 294-6160

https://www2.econ.iastate.edu/faculty/plastina/

mailto:[email protected]

https://www2.econ.iastate.edu/faculty/plastina/

Documents

Farm Financial Situation: U.S. and Iowa€¦ · Strategies: 5. Revise family living expenses • Can big-ticket items be avoided/postponed? –Truck purchase –House remodeling plans