Farm Financial Situation and Strategies for 2020-2025 US Farm - - PDF document

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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.

• S. Ne

Net t Farm m Income me (NF NFI) and Ne Net t Cash Farm m Income me (NC 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.

Go Government Farm

m Program m Payme yments ts

Source: USDA/ERS, Farm Income and Wealth Statistics. August 30, 2019.

2019 FP Payments +42.5% MFP +5.8 billion

U.S. Farm m Sector tor Liquidity ty

0.0 0.5 1.0 1.5 2.0 2.5 3.0 20 40 60 80 100 120 140 160 180 Millions 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 m Sector tor 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 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 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

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.” AgDM Newsletter 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 Newsletter23 (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

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 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.

St Strategies gies to

• mana

manage ge mar margins gins

• 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 & Hart December 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/