Farm Progress

Working Capital: The Financial Shock Absorber

David Kohl, Contributing Writer, Corn+Soybean Digest

April 12, 2010

2 Min Read

As air travel is becoming less dependable and more inconvenient, the Road Warrior is in the process of reinventing the delivery of information. Yes, face-to-face seminars and speeches will continue to be conducted, but in recent years, Web casts and video conferences have made huge strides in connecting with audiences, without the hassle of travel. In a recent Web cast for Minnesota producers, financial ratios were being discussed, with a focus on working capital.

One producer asked for an example of a good working capital-to-revenue metric. Does it vary by commodity group? The excellent data from FINBIN – with over 2,000 producers’ financial information – provided a four-year trend with various tiers of management success. The defined measure is working capital divided by gross farm revenue. The top 20% of producers increased working capital to revenue from 28% to 43% in the past four years. The average producers increased this financial metric from 20% to 33%, while the low 20% were in single digits three of the four years.

Evaluating the data by commodity, crop producers fared vary well because of favorable economic cycles, with working capital from 29% to 50% of revenue. However, the low 20% were negative or in the low single digits three of four years.

The dairy sector averaged 10-15% for average and above-average producers, but again the low end was negative.

Hogs, being in the low end of the economic cycle in recent years, had a drop from the mid-30% range to 15% for the top 20% of producers. The average producers ranged mid-20% to a drop of 10% in recent years. Of course, the low 20% were consistently in the negative range.

What is your financial metric for working capital? More lenders are utilizing this metric in the lending decision making process.

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected].

About the Author(s)

David Kohl

Contributing Writer, Corn+Soybean Digest

Dr. Dave Kohl is an academic Hall of Famer in the College of Agriculture at Virginia Tech, Blacksburg, Va. Dr. Kohl has keen insight into the agriculture industry gained through extensive travel, research, and involvement in ag businesses. He has traveled over 10 million miles; conducted more than 7,000 presentations; and published more than 2,500 articles in his career. Dr. Kohl’s wisdom and engagement with all levels of the industry provide a unique perspective into future trends.

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