It is that time of year when the annual FINBIN data from the University of Minnesota’s Center for Farm Financial Management is released. Of course, 2020 was an interesting year for agriculture and society in general. What were some of the outcomes and surprises in the financial data summaries? The overall financial performance of the participating farms mirrors outcomes not seen since the great commodity super cycle that bestowed record incomes on the agriculture industry about one decade ago.
Term debt coverage ratio
The average term debt coverage ratio for all farms was 274 percent in 2020. The results of this metric are very similar to the 2010 to 2012 period. Analysis of the top 20 percent of farm businesses finds the term debt coverage ratio at nearly 400 percent while the bottom 20 percent of producers had a coverage ratio of 72 percent. What would this ratio be if government stimulus checks and assistance were deducted? A prominent upper Midwest banker indicated that his customers’ average coverage ratio was 248 percent, similar to the business summaries. When the government checks were eliminated, the ratio fell to 114 percent. Therefore, the 2020 data may be yielding some inflated numbers in terms of the term debt coverage ratio
Return on assets
The rate of return on assets for the average producer was 7.8 percent, which is quite stellar! This level of return is similar to the great commodity super cycle. The top 20 percent of returns were in double digits and the bottom 20 percent generated a return on assets of negative 1.7 percent.
Operating expense to revenue ratio
The operating expense to revenue ratio, excluding interest and depreciation expenses, averaged 71 percent! This means that 29 percent of revenues were available for family living expenses, debt service, capital investment, and income taxes. The top 20 percent of producers had an operating expense to revenue ratio of 68 percent, which was not significantly different than the average. However, the bottom 20 percent of producers had an operating expense to revenue ratio of 89 percent, which is an improvement compared to the last three years.
Producers built their war chest of working capital in 2020. The average producer had a current ratio of approximately 2 to 1, while the top 20 percent had a current ratio of about 2.5 to 1. Even the bottom 20 percent of producers had a positive current ratio of 1.23 to 1.
What was significant was that the debt levels, measured by the debt to asset ratio, were in the 40 to 50 percent range regardless of whether producers ranked in the top 20 percent, the average, or the bottom 20 percent. The interest expense to revenue ratio was under five percent for the average and above average group and was slightly higher for the bottom 20 percent of producers. This may be about to change because higher interest rates are likely in the future as a result of inflation.
Source: Dr. 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.