Farm Progress

ISU Extension has a number of free resources available to help farmers with financial planning.

Alejandro Plastina

September 19, 2017

3 Min Read
JUST DO IT: Examining your farm’s financial health and taking corrective steps can involve some tough choices, but the sooner you do it the greater your chances are of success.

Iowa farm financial conditions have deteriorated since 2012, but average indicators of liquidity and solvency remain close to their long-term levels. However, average financial measures mask the variability across farms. We have tracked the evolution of financial stress in Iowa farms using a panel of financial statements collected by the Iowa Farm Business Association.

Changes in liquidity. Financial liquidity is measured in terms of the current ratio: current assets divided by current liabilities. In December 2014, almost half (47.3%) of the farms had a strong liquidity rating, and less than one third (31.5%) of the farms had vulnerable liquidity ratings (Figure 1). By December 2015, the percent of farms with vulnerable liquidity ratings increased by 9.2 percentage points, and vulnerable farms accounted for about the same share as farms with strong liquidity ratings: 40.7% vs. 41.4%.

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By December 2016, there were more farms with vulnerable liquidity ratings than farms with strong liquidity ratings, representing 42.9% versus 41.7% of the sample, respectively. More than 2 in 5 farms run the risk of not being able to pay off their obligations as they become due over the course of 2017.

Changes in solvency. Financial solvency is measured in terms of the debt-to-asset ratio: total liabilities divided by total assets. In December 2014, only 1 in 5 farms (20.5%) was assigned a vulnerable solvency rating (Figure 2). But a year later, almost 1 in 4 farms (24.5%) had a vulnerable solvency rating. By December 2016, slightly more than 1 in 4 farms was highly leveraged. In any case, by comparing figures 1 and 2, it becomes apparent that solvency issues are much less prevalent than liquidity issues. However, it must be noted that machinery, land and other long-lived assets are valued at their cost (or book) value, and therefore do not reflect the recent decline in asset values.

Financially stressed farms. The share of financially stressed farms (vulnerable liquidity or solvency ratings) increased from 38% in December 2014 to 47% in December 2016. The average loss in working capital across all farms in the sample amounted to $123 per acre in 2015 and $57 per acre in 2016, accumulating a $180 loss over the entire period. But farms with vulnerable liquidity ratings in December 2016 accumulated an average loss in working capital of $347 per acre.

Anecdotal evidence suggests that financially stressed farms are likely to have already tried a few or several strategies to improve their bottom line. So quick fixes are likely to have already been exhausted. These operations will have to re-evaluate how they generate profits, by enterprise, parcel, leasing contract, and so on, to come up with a bold, encompassing strategic plan to generate a solid stream of profits over the next few years that also accounts for the need of short-term financing, or otherwise play the odds of going out of business.

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Farm financial planning can involve some tough choices, but the sooner it is tackled, the higher are the chances of success. To facilitate the planning process and to provide support to the people directly or indirectly related to financially stressed farms, ISU Extension has a new publication listing and describing the resources available free to help farmers with their farm financial planning.

Review the publication, Financial stress in Iowa farms: 2014-2016, FM 1892R.

Plastina is an Iowa State University Extension economist. Contact him at [email protected].

About the Author(s)

Alejandro Plastina

Alejandro Plastina is an Iowa State University Extension economist. His areas of expertise include agricultural and natural resource economics.

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