Long-Run Trends in Profitability and Farm Size

Michael Langemeier

Dept. of Ag. Econ.

Kansas State University

Introduction

• Three concerns revolving around current credit crisis– Financial Stress

• Negative Return on Equity• High Debt to Asset Ratio

– Divergence of Farm Performance– Government Bailout

First ConcernFinancial Stress

• Even with the strong financial performance of the last couple of years there are still a substantial number of farms with either a negative return on equity, a high debt to asset ratio, or both.

• Upcoming Slides– Current financial position– Vulnerabilities– Financial stress

Trends in Net Farm Income

Financial Efficiency Measures

Non-Irrigated Crop Enterprises

Cow-Calf Enterprise

Backgrounding Enterprise

Trends in Liquidity

Trends in Liquidity

Trends in Solvency

Potential Vulnerabilities in 2009

• Input price increases

• Farmland value volatility

• Overall debt structure and solvency of some farm businesses

• Access of farm households to credit

• Off-farm income during a national recession– USDA-ERS, December 2008

Financial Stress

• The USDA-ERS defines vulnerable farms as those with a negative net farm income and a debt to asset ratio above 0.40.– U.S. Farms, 2007

• 3.5% of farms are vulnerable

– KFMA Farms, 2007• 6.8% of farms are vulnerable

Financial Stress

• Financial stress is often measured by examining farms with a negative return on equity and a debt to asset ratio above 0.70.

• KFMA Farms, 2003 to 2007 Averages– Negative Return on Equity = 40.33%– High Debt to Asset Ratio = 13.04%– Financially Stressed = 7.03%

Profit Margin Ratio

Financial Stress

Measure

Average Benchmark

Negative ROE 40.33% 0.37%

High Debt 13.04% 7.41%

Financial Stress 7.03% 0.37%

Financial Stress

Second ConcernDivergence of Farm Performance

• Recent thesis by Lindsey Snider– KFMA Data

• Five-year snapshots from 1973 to 2007• Data sorted into deciles using value of farm production• Variables

– Total Acres– Economic Total Expense Ratio– Operating Profit Margin Ratio– Asset Turnover Ratio– Percent Income from Livestock

• Changes in economies of size

Total Acres

Economic Total Expense Ratio

Operating Profit Margin

Asset Turnover Ratio

Percent Income from Livestock

Economies of Size

• Five-Year Snapshots– 1973 to 1977– 1978 to 1982– 1983 to 1987– 1988 to 1992– 1993 to 1997– 1998 to 2002– 2003 to 2007

Changes in Economies of Size

Third ConcernGovernment Bailout

What is the Real Cost

of the Great Bailout

of 2008-2009???

Possible Impacts

• Inflation

• Interest Rates

• Social Security and Medicare

• Economic Freedom– Government funds typically come with “strings attached”

– Government dominated economies tend to have slower economic growth

Contact Information

• Michael Langemeier

– mlange@agecon.ksu.edu

– Ag Manager Contributor site• KFMA Newsletter• Credit Crisis References