A discussion with an agriculture producer from the Midwest found that the lower prices, elevated costs, and higher interest rates are taking their toll. A midyear financial checkup revealed that he had over $100,000 of accrual adjusted earnings lost in the first half of 2024 due to lower prices of commodities in his bins.

Next, the higher cost of putting crops in the ground now represents a possible budget loss of $75,000. Add-on another $50,000 for unexpected equipment repairs. These items have contributed to a decline in working capital of over $200,000 in just the first six months of 2024. Fortunately, he had a $650,000 reserve of working capital built up to cushion the blow.

Analysis of the financial ratio data for 2023, provided by Aaron Brudelie of Minnesota West Community and Technical College, confirms the financial slippage compared to previous years. The term debt and lease coverage ratio, which measures repayment capacity, found that the average ratio for all farms was 125 percent, which is the lowest level in five years. This ratio was down significantly from the COVID era when the average coverage ratio was in the 300 percent range.

Repayment issues are apparent with the bottom 20 percent of producers coming in with a coverage ratio of just 33 percent, which is well below the breakeven of 100 percent needed to meet all debt service payments. It is quite obvious that refinancing requests for operating losses will be coming from this segment of farms. Even the top echelon of producers in the top 20 percent of net income have observed significant declines in the term debt and lease coverage ratio, which was down over 200 percent from the pandemic years.

Profitability

Profits are the oxygen of business sustainability. The goal is for the return on assets (ROA) to exceed the rate of inflation and interest rates as a measure of real earned net worth. Analysis of the 2023 data finds that the average ROA was 2.1 percent. While positive, it fails to meet the rate of inflation and interest rate goals and metrics.

The bottom 20 percent of producers had a ROA of negative 4.7 percent. It is apparent that losses are compounding very rapidly with inflated land values, through appreciation, while farms are having difficulty making a profit. The ROA for the top rung of producers in the top 20 or even the top 10 percent has declined to the 6 to 7 percent range, which is about half of what was reported during the three prior years.

The financial slip

Slippage can be absorbed for a year or two with a generous lender refinancing debt. In the long-term, some tough decisions on costs, capital expenditures, and family living withdrawals will be required. This is not the 1980s. However, if land values were to decline, then a financial crisis in agriculture could be around the corner. In the next article, we will examine more results from the data.