Iowa Farm Financial Conditions - extension.iastate.edu · Data • Source: Iowa Farm Business Association • Actively Managed Mid-size Commercial Farms • Focus on Farm Management

Iowa Farm Financial

Conditions

Alejandro Plastina, PhD

Assistant Professor, Economics

Le Mars, IA

December 1, 2017

Overview

1) How has the financial situation of Iowa

farms changed over the last 3 years?

2) What did successful farms do differently

in 2016?

Data• Source: Iowa Farm Business Association

• Actively Managed Mid-size Commercial Farms

• Focus on Farm Management Decisions

• Machinery and Land recorded at COST value

Average Net Farm Income in Iowa:

(accrual, nominal)

$243,072

$27,927$45,597

$0

$50,000

$100,000

$150,000

$200,000

$250,000

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

1.7%1.0%0%

5%

10%

15%

20%

25%

30%

35%

40% Operating profit margin ratio Rate of return on farm assets Rate of return on farm equity


Average Farm Liquidity & Solvency

Liquidity: Current Ratio = Current Assets/Current Liabilities Solvency: Debt-to-Asset Ratio = Total Liabilities / Total Assets

Higher better Lower better

Track evolution of same set

of farms through time

• December 31, 2014



• Number of farms =273

IFBA Farms vs. Ag Census

0 10 20 30 40 50

a)1 to 9

b)10 to 49

c)50 to 179

d)180 to 499

e)500 to 999

f)1000 and up

Distribution of Farms by Size (Acres), in %

IFBA Census

0 10 20 30 40 50

a)Under 25

b)25 to 34

c)35 to 44

d)45 to 54

e)55 to 64

f)65 and up

Distribution of Farms by Age of Principal Operator, in %

IFBA Census

Farms grouped according to:

1) LIQUIDITY RATING:

• Strong:

Current ratio > 2

• Under Watch:

1.3 < Current ratio < 2

• Vulnerable:

Current ratio < 1.3

2) SOLVENCY RATING

• Strong:

Debt-to-Asset Ratio < 30%

• Under Watch:

30% < DTA Ratio < 60%

• Vulnerable:

DTA ratio > 60%

Source: Farm Financial Scorecard

+8.1%+2.2%31.5%

40.7% 42.8%

FinancialLiquidity

Plastina, A.2017. “"Financial Stress in Iowa Farms: 2014-2016.“ FM 1892 R. https://store.extension.iastate.edu/product/15261

+4%+0.8%20.5% 24.5% 25.3%

FinancialSolvency

Plastina, A.2017. “"Financial Stress in Iowa Farms: 2014-2016.“ FM 1892 R. https://store.extension.iastate.edu/product/15261

Classification MatrixSolvency: Total Debt-to-Asset Ratio

Strong:

Under 30%

Watch:

Between 30%

and 60%

Vulnerable:

Above 60%

Liquidity:

Current

Ratio

Strong:

Over 2.0

Watch:

Between 1.3

and 2.0

Vulnerable:

Below 1.3

Current Ratio = Current Assets/Current LiabilitiesDebt-to-Asset Ratio = Total Liabilities / Total Assets

Dec 31, 2014 (273 farms)

Plastina, A.2017. “A panel study of Iowa Farm Financial Conditions: 2014-2016.” AAEA Meetings, Chicago, August 1.

Percent of Farms in Each

CategorySolvency: Total Debt-to-Asset Ratio

Strong:

Under 30%

Watch:

Between 30%

and 60%

Vulnerable:

Above 60%

Liquidity:

Current

Ratio

Strong:

Over 2.033.0% 12.1% 2.2%

Watch:

Between 1.3

and 2.07.0% 10.6% 3.7%

Vulnerable:

Below 1.3 2.6% 14.3% 14.7%

Dec 31, 2014 (273 farms)Percent of Farms in Each


Strong:

Under 30%

Watch:

Between 30%

and 60%

Vulnerable:

Above 60%

Liquidity:

Current

Ratio

Strong:

Over 2.0

Watch:

Between 1.3

and 2.0

Vulnerable:

Below 1.3

Total Vulnerable:

37.4%Plastina, A.2017. “A panel study of Iowa Farm Financial Conditions: 2014-2016.” AAEA Meetings, Chicago, August 1.


Category

(Change from last year)

Solvency: Total Debt-to-Asset Ratio

Strong:

Under 30%

Watch:

Between 30%

and 60%

Vulnerable:

Above 60%

Liquidity:

Current

Ratio

Strong:

Over 2.0

29.3% (-3.7%)

10.6% (-1.5%)

1.5% (-0.7%)

Watch:

Between 1.3

and 2.0

6.2% (-0.7%)

9.2% (-1.5%)

2.6% (-1.1%)

Vulnerable:

Below 1.3

2.9% (0.4%)

17.2% (2.9%)

20.5% (5.9%)




Strong:

Under 30%

Normal:

Between 30%

and 60%

Vulnerable:

Above 60%

Liquidity:

Current

Ratio

Strong:

Over 2.0

Normal:

Between 1.3

and 2.0

Vulnerable:

Below 1.3

Total Vulnerable:44.7% (+7%)



Category

(Change from last year)

Solvency: Total Debt-to-Asset Ratio

Strong:

Under 30%

Watch:

Between 30%

and 60%

Vulnerable:

Above 60%

Liquidity:

Current

Ratio

Strong:

Over 2.0

30.8% (1.5%)

10.3% (-0.4%)

0.7% (-0.7%)

Watch:

Between 1.3

and 2.0

6.2% (0%)

6.2% (-2.9%)

2.9% (0.4%)

Vulnerable:

Below 1.3

2.9% (0%)

18.3% (1.1%)

21.6% (1.1%)




Strong:

Under 30%

Watch:

Between 30%

and 60%

Vulnerable:

Above 60%

Liquidity:

Current

Ratio

Strong:

Over 2.0

Watch:

Between 1.3

and 2.0

Vulnerable:

Below 1.3

Total Vulnerable:46.5%

(+1.8%)


Changes in

Working Capital

per Acre

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

2) What did successful farms

do differently in 2016?

Average Net Farm Income in Iowa:

(accrual, nominal)

$243,072

$27,927$45,597

$0

$50,000

$100,000

$150,000

$200,000

$250,000


Farmers can live off depreciation for short periods of time

Adjusted Farm Cash Income

(AFCI = NFI + Depreciation)• AFCI measures the capacity of the farm to

generate free cash flows:

• AFCI>0: cash from the operation can be used

to pay taxes, reduce principal owed, purchase

capital assets, or pay family living expenses.

• AFCI<0: shortfall must be covered by off-farm

income, or reductions in family living

expenses.

Average NFI and Adjusted Farm Cash

Income (AFCI = NFI + Depreciation)

$45,597

$113,168

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

NFI Accrual AFCI


Grouping of 527 farms

1) Ordered all farms from largest AFCI to smallest AFCI

2) Divided the sample into 5 equal groups:

Top 20%

Upper 20% to 40%

Middle 20%

Lower 20% to 40%

Lowest 20%

2016 Adjusted Farm Cash

Income per Acre ($)$274

$206

$157

$102

-$65

$164

Top 20% Upper 20%to 40%

Middle 20% Lower 20%to 40%

Lowest 20%

Cash Farm Income Quintiles Average

-10000%

-5000%

0%

5000%

10000%

15000%

20000%

25000%

30000%

RO

A (

Perc

ent)

Source: A.Plastina’s calculations based on IFBA data

Average Farm Size (Acres)

by 2016 AFCI Quintile

1,181

799 633

510 556

736

0

200

400

600

800

1,000

1,200

1,400



Lowest 20%



2016 Total Expenses per Acre

$1,151

$864 $881 $910

$1,456

$1,055

0

200

400

600

800

1,000

1,200

1,400

1,600



Lowest 20%


Tota

l Exp

ense

s


0%10%20%30%40%50%60%70%80%90%

100%

Top 20% Upper 20% to40%

Middle 20% Lower 20% to40%

Lowest 20% Average

Cash Farm Income Quintiles

Cash Grain Grain-Livestock Hog Beef Mixed

2016 Sources of AFCI by Group


2016 Cost of Debt and Interest

Expense Ratio by Group

3.7% 4.6%

7.4% 7.6%

15.8%

8.0%

4.2% 4.0% 4.9% 4.9%

13.0%

6.3%

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18



Lowest 20%


Cost of Debt (End)

Interest Expense Ratio


Interest Expense/Total Liabilities

Interest Expense/Gross Farm Revenue

2016 Average Corn Yield

and Price Received by Group

217.3 214.7 208.3 205.6

199.4

209.1

$3.54$3.49

$3.45

$3.36$3.31

$3.43

$3.15

$3.20

$3.25

$3.30

$3.35

$3.40

$3.45

$3.50

$3.55

$3.60

190

195

200

205

210

215

220



Lowest 20%


Pri

ce (

do

llare

s p

er b

ush

el)


Top vs. Bottom: +9% yield; +7% price

2016 Average Soybean Yield

and Price Received by Group


64.6 64.0 63.5

61.9 61.4

63.1

$9.25

$9.08 $9.09$9.05

$8.87

$9.07

$8.60

$8.70

$8.80

$8.90

$9.00

$9.10

$9.20

$9.30

59

60

61

62

63

64

65



Lowest 20%


Pri

ce (

do

llare

s p

er b

ush

el)

Yiel

d (

bu

shel

s p

er a

cre)

Top vs. Bottom: +5% yield; +4% price

Average Liquidity in Dec 2016

$591 $597 $565

$401

$238

$508



Lowest 20%


Working Capital per Acre


Liquidity Ratings Dec 2016

29% 30% 31% 37%

62%39%

17% 10% 16%19%

13%

15%

54% 59% 53% 44%25%

46%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%



Lowest 20%


a)Vulnerable (CR<=1.3) b)Normal(1.3<CR<=2.0)c)Strong (CR>2)


Average Solvency in Dec 2016

$2,798 $2,851$2,543 $2,477

$1,837

$2,577



Lowest 20%


Farm Net Worth per Acre Farmed


Solvency Ratings Dec 2016

(Debt to Asset Ratio)

22%10% 16% 24%

47%25%

36%

34%45% 22%

25%

33%

42%56%

39%54%

29%43%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%



Lowest 20%


a)Vulnerable(DTA>60%) b)Normal(30%<DTA<=60%)c)Strong (DTA<=30%)


Percent of Vulnerable Farms

Dec 2016

19%8% 8%

19%

40%

20%

10%22% 23%

19%

22%

19%3% 2%8%

6%

7%

5%

0%

10%

20%

30%

40%

50%

60%

70%



Lowest 20%


Liq & Solv Vulnerable

Only Liq Vulnerable

Only Solvency Vulnerable


Lower expenses per acre

Less Specialized in Livestock

Lower Cost of Debt and Interest Expense

Better Marketing

Better Yields

Higher liquidity

Higher solvency

2) What did successful

farms do differently in 2016?

Financial stress might affect…

Family living expenses /Repayment of loans

Local jobs

Local communities

Family relations / stress

Litigation

ISU Extension and Outreach Iowa Concern Hotline: 800-447-1985www.extension.iastate.edu/iowaconcern

http://www.extension.iastate.edu/iowaconcern

Concerns for 2017 & 2018

• Low profitability margins

• A sizable share incurring cash losses

• 44% of all farms are financially vulnerable

• 70% of the farms in the bottom group are

financially vulnerable

• Liquidity problems are more widespread

than solvency problems

More Information

1. Financial stress in Iowa farms: 2014-2016. https://store.extension.iastate.edu/Product/15261

2. 2016 Iowa Farm Costs and Returns: https://www.extension.iastate.edu/agdm/wholefarm/pdf/c1-10.pdf

3. Financial Performance Measures for Iowa Farms: https://www.extension.iastate.edu/agdm/wholefarm/html/c3-55.html

4. ARC/PLC Payments by County in Iowa: http://card.iastate.edu/tools/farm-bill/arc-plc/

https://store.extension.iastate.edu/Product/15261

https://www.extension.iastate.edu/agdm/wholefarm/pdf/c1-10.pdf

https://www.extension.iastate.edu/agdm/wholefarm/html/c3-55.html

http://card.iastate.edu/tools/farm-bill/arc-plc/

Thank you for your attention!

Questions?

Alejandro Plastina

Assistant Professor/Extension Economist

[email protected]

(515) 294-6160

mailto:[email protected]

Documents

Iowa Farm Financial Conditions - extension.iastate.edu · Data • Source: Iowa Farm Business Association • Actively Managed Mid-size Commercial Farms • Focus on Farm Management