Experts say working capital will be reduced for many farms in 2015; Here's how to estimate changes

October 12, 2015

Experts say working capital will be reduced for many farms in 2015; Here's how to estimate changes

Working capital will be reduced on many Midwest farms in 2015, says University of Illinois professor Gary Schnitkey, who in a recent farmdoc daily post offers a process farmers can use to estimate working capital changes.

Table 1 shows a process for estimating working capital changes for 2015. Values used in this table are meant to represent the typical case. This process begins with corn and soybean budgets.

In Table 1, budgets are adapted from 2015 Illinois Crop Budgets for low-productivity farmland in central Illinois. Yields per acre are 185 bushels per acre for corn and 60 bushels per acre for soybeans.

Prices used in budgets are \$3.90 per bushel for corn and \$8.90 per bushel for soybeans. Corn has an operator and land return of \$163 per acre. Soybeans have a \$209 per acre operator and land return. A 50% corn and 50% soybean rotation results in \$186 per acre of operator and land return (see the third column of Table 1).

Working capital changes are estimated for owned, cash rented and share rented farmland, as shown in the final three columns of Table 1.

In calculating working capital changes, all land control methods begin with the \$186 per acre operator and land return, the same as for the 50-50 rotation. From these operator and land returns, five general areas of cash flow adjustments are made to arrive at working capital changes:

Land control cash flows: For owned farmland, cash flows are property taxes and farm mortgage repayments (including principal and interest). In Table 1, land control cash flows are \$30 per acre for property tax and \$100 for farm mortgage repayments. For cash rent farmland, land control costs are cash rent, set at \$240 per acre roughly equal to the average for this land productivity. Share rent costs are \$191 per acre, equaling the land owner's share of gross revenue and direct costs. In Table 1, a 50-50 share rent agreement is used.

Old crop marketing: Old crop marketing represents the difference in the sales price of the old crop from the value of the old crop placed on the end-of-year 2014 balance sheet. No marketing losses are included, although some farms could have significant losses.

Capital purchase/depreciation differences: If capital purchases are less than depreciation, then working capital will not decrease as much as indicated by depreciation. In the 2015 budgets, depreciation for machinery and building is at \$74 per acre (see Table 1). Capital purchases are set at \$45 per acre, roughly the level of purchases between 2000 through 2004.

Financing activities: These cash flows include acquiring debt and principal payments on non-land items. Farm mortgage principal is contained in land control cash flows. New debt of \$20 per acre represents financing on new machinery purchases is used in calculations. Principal payments are \$50 per acre.

Non-farm cash flows: Other income includes off-farm jobs and returns on non-farm investments. Family living is set at \$95 per acre, down from the average in recent years. Income and social security taxes are at \$20 per acre.

Given these estimates, working capital change is projected at -\$11 per acre for owned farmland, meaning that working capital would decrease \$11 for each acre owned. Cash rent has a -\$121 per acre working capital change and share rent has a -\$72 change.

While Schnitkey notes that the above estimates are close to an "average" farm, they will vary.

Debt position, off-farm activities, and capital purchases will all impact working capital changes. Also having an impact on working capital will be the level of cash rent. Cash rents will vary from farm-to-farm by as much as \$100 per acre. As a result, individual farms should estimate working capital changes on their individual farms.

Obviously, land tenure differences will impact working capital changes. Farms with more owned farmland likely would have less negative, and maybe even positive, changes in working capital, Schnitkey says.

Farms with a high proportion of cash rent farmland will have much larger working capital losses. Farms with a high proportion of cash rent farmland at high cash rent levels will be the farms with the largest working capital erosions.

Read the full entry on Farmdoc daily, "Significant Reductions in Working Capital Likely in 2015 on Grain Farms"

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