I am writing this article while flying over Denver on my way to the Golden State on Delta Air Lines. My neighbors on the plane are playing computer games and watching the latest movies while I am pouring over the newly released 2018 FINBIN data from the Center for Farm Financial Management at the University of Minnesota. Let’s examine some of the latest data and determine how your operation stacks up.
First, the farm businesses included in the database are usually above-average record keepers. They often work with farm management instructors and others to capture and compile the data, so the accuracy and transparency is better than the typical farm. Second, the data includes trend analysis over the past decade.
Return on assets
Return on assets (ROA) was down considerably for the sixth straight year. For the average farm, the ROA was 1 percent, which is below the rate of inflation and the average cost of borrowed monies. Since 2012, the highest rate of return for the average producer in the database was a sluggish 3.7 percent. Even the ROA for the top 40 percent of producers was less than 6 percent, which is way below the returns of 11 to 19 percent recorded during the super cycle era from 2007 to 2012.
A decline in profitability is usually a foreteller of cash flow and financial liquidity issues. The proof is in the pudding! After talking with agricultural lenders, many indicate that up to 40 percent of their borrowers are seeking a refinance or have restructured their debt in recent years. Thank goodness land values have remained stable to allow this option.
What events could change these financial fortunes for 2019? An unfavorable weather event in the “I” states: Iowa, Illinois or Indiana, or in the productive regions of South America could boost grain prices. On the livestock side, very little change can be envisioned until supply, demand and export markets have free flow.
Financial liquidity in the database is measured by the current ratio. The results of this metric are surprising as the average producer’s current ratio was 1.5 to 1. The current ratio for the bottom 20 percent of producers was just above 1 to 1 and the current ratio for the top 20 percent of producers was 2 to 1. Why has this metric maintained resilience? The answer may be the rebalancing or the refinancing of the balance sheet. Many producers have restructured their balance sheet to increase working capital rather than building the current ratio through cash flow and earnings. Again, thank goodness for the resiliency in land values which allow refinancing to be an option.
Stay tuned for the next column where I will discuss more on the numbers from 37,000 feet!