June 29, 2022
There is an old saying in business and economics that when the bottom 20 percent of producers in an industry makes money, an economic correction is around the corner. Examination of the FINBIN database, managed by the University of Minnesota’s Center for Farm Financial Management, provides evidence of storm clouds on the horizon. The financial summary includes accrual adjusted financial information from over 3,000 farms representing many states.
The 2020 and 2021 return on assets results for the bottom 20 percent of producers mirrors results from 2011 and 2012 during the great commodity super cycle. The years following the great commodity super cycle are known as the “grinder years” where margins and profits were suppressed pre-pandemic. What is alarming is in the past two years that the net incomes were bolstered by stimulus checks from the government, which presents a false sense of security. In addition to higher net incomes in the past two years, increased land values and other appreciated paper wealth provides another layer of a false sense of security.
Examination of the average and the top 20 percent of producers based on net income finds very positive trends. Both the average and the top 20 percent generated a return near the peak of the great commodity super cycle in 2011 and 2012. Overall nominal and constant dollar median net farm income was the second highest in a 25-year period starting in 1996.
Within these results, hog farms experienced by far the best year in 2021, followed by grain and beef operations. Median net farm income for dairy farms was down from 2020, but still one of the highest on record with the exception of the record year in 2014.
For all of the profit segments, some major questions need to be asked in 2022 and particularly in 2023.
What will be your financial plan post government support payments?
What will be your strategy for a high price, high inflation environment where margin management will be a top priority?
What if land value appreciation tempers and paper wealth gains level out or contract in some areas of the country?
Similar to the late 1970s and early 1980s economic transition in agriculture, a focus on profits and cash flow backed by working capital were the first, second, and third options for resilient, agile businesses. Will the bottom 20 percent of producers be a bellwether of economic fortunes to come? I would not bet against it this time!
Source: David Kohl, which is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.
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