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Working capital forecast to decline again in 2019.

Forrest Laws

June 17, 2019

Working capital is not a phrase that easily rolls off most farmers’ tongues. Profits (or losses) are more common, but working capital (current assets minus current liabilities) is an important measure of a grower’s ability to withstand economic stress.

The trend on working capital hasn’t been good, according to Greg Cole, president and CEO of the Little Rock, Ark.-based AgHeritage Farm Credit Services, who spoke at the Mid-South Agricultural and Environmental Law Conference in Memphis, Tenn.

“We lost more than $100 billion of working capital in farmers’ balance sheets,” said Cole, referring to a slide showing the rise and fall of working capital and net farm income between 2009 and 2019. (Working capital peaked at $165.1 billion in 2012 and declined to $56 billion in 2018.)

“That is a very rapid change in that measurement in retrospect,” he noted. “And this is on top of a lot of farmers refinancing or replenishing their working capital in the years between that ‘super-cycle’ and now." (Working capital is forecast to decline again in 2019.)

Cole used an example of two air tanks to represent a farmer’s balance sheet. In the top tank is the farmer’s current assets, current liabilities and working capital or liquidity. In the bottom tank is the farmer’s farm equipment and farm real estate.

“When you have operating losses, it comes out of liquidity, so the top air tank declines,” he said. “There’s been a lot of refinancing, so air from the bottom tank has been shifted to the top. That’s one reason people are still farming – they still had air in the tank, and they shifted it up. In a lot of cases, those air tanks are running short.

“One of the things that can exacerbate this is if farm real estate values begin to decline, that bottom air tank is going to be sucking air. We’re still in business, but some farmers are close to their last breath, and that’s in the bottom 25 percent.”

Cole expressed some surprise at the forbearance of lenders in the face of such adversity.

“Lenders have stayed with borrowers a lot longer than I thought,” he said, referring to the precipitous drop in farm incomes since 2013. “I go back to the 1980s. I showed a slide earlier that indicated the two worst years for net farm income in the last 100 years were 1933 and 1984. I started my career in 1984. I was there for D-Day.”

So how are farmers doing today? He displayed a slide containing a series of quotes attributed to Dr. Danny Klinefelter, professor of agricultural economics at Texas A&M University, that Cole said best sums up the current situation.

“The function of a competitive market is to drive the economic return to the average producer to breakeven through supply and demand in both input and output markets,” he quoted Klinefelter as saying. “It’s like in a super-cycle – if everyone is making money that doesn’t last very long; if everyone is losing money that doesn’t last very long. It goes to equilibrium. I believe we’re bouncing around equilibrium now.

“In equilibrium, the top end of farmers are profitable and growing; the average are hanging in there; and the bottom end are losing money and exiting the industry,” he noted. “That’s really a depiction of where we are. The difference is that because of a strong farm safety net and all those factors I listed the bottom third is still hanging in there. But the air in the tank is getting real low.”

In the final part of the quote, Klinefelter says: “Business success and survival depend on continuous improvement at a pace to stay in the front half of the pack.”

“The ones that are going to make it possess that,” Cole said. That’s a good depiction of where we’ve been and where we’re going in the ag economy.”

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About the Author(s)

Forrest Laws

Forrest Laws spent 10 years with The Memphis Press-Scimitar before joining Delta Farm Press in 1980. He has written extensively on farm production practices, crop marketing, farm legislation, environmental regulations and alternative energy. He resides in Memphis, Tenn. He served as a missile launch officer in the U.S. Air Force before resuming his career in journalism with The Press-Scimitar.

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