11/11/2019
1
Alejandro Plastina, Ph.D.Assistant Professor/Extension Economist
Department of Economics
Pro-Ag Sioux City, IA – Nov 11, 2019
Farm Financial Situation and Strategies for 2020-2025
• US Farm Finances
• Iowa Farm Finances
• Strategies for Next 5 years
Overview
11/11/2019
2
• 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.
11/11/2019
3
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
11/11/2019
4
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.
11/11/2019
5
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
020406080100120140160180
Millions
Working Capital ($1,000) Current Ratio
Source: USDA/ERS, Farm Income and Wealth Statistics. August 30, 2019.
11/11/2019
6
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.
11/11/2019
7
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
11/11/2019
8
$58,832 $86,480
$0
$50,000
$100,000
$150,000
$200,000
$250,000
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
NFI Accrual
NFI Cash
Net Farm Income in IowaCash 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.
11/11/2019
9
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.
11/11/2019
10
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 Loss per acre since 2014, by Liquidity Status in 2018
‐$189
‐$277‐$307
‐$287
‐$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).
11/11/2019
11
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.
3.613.80
3.40 3.40 3.45 3.45 3.50 3.55
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
8.48 9.00 8.85
8.45 8.55 8.60 8.70 8.85
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.
11/11/2019
12
Market Facilitation Program 2019 County 1st Round Per Acre Payment Rate
Announced July 2019Source: USDA, www.farmers.gov/manage/mfp
Market Facilitation Program 2019 County 2nd Round Per Acre Payment Rate
Announced November 2019Source: USDA, www.farmers.gov/manage/mfp
11/11/2019
13
Market Facilitation Program 2019 County TOTAL Per Acre Payment Rate
Source: USDA, www.farmers.gov/manage/mfp
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!
11/11/2019
14
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?
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
11/11/2019
15
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, ???
11/11/2019
16
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 2020-2025• 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 saletax advisor
11/11/2019
17
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
1. 2019 ARC-CO and PLC Corn about $11/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
11/11/2019
18
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
11/11/2019
19
Thank you for your attention!
Questions? Comments?
Alejandro Plastina
(515) 294-6160
https://www2.econ.iastate.edu/faculty/plastina/