June 2018 KFMA Newsletter (Web Version)
Kevin Herbel- KFMA Administrator
While the agriculture sector continues in a period of tight margins and cash flow constraints, the average net farm income for KFMA member farms increased to $62,944 in 2017. There is much variability from farm to farm within the data – differences in production (record yields for some, drought for others), differences in financial position and cost structure, differences in decision making and management of risk. For summary reports of the KFMA data, please visit www.agmanager.info/KFMA.
As we do each year, six KFMA economists and myself participated in a roundtable discussion of the new reports for the May 10 edition of the “Agriculture Today” radio program, produced by K-State Research and Extension. That discussion is available online at http://agtodayksu.libsyn.com/report-2017-kansas-net-farm-income-agriculture-today-may-10-2018. A follow up interview was completed and will air the final week of June. All Agricultural Economic related radio show recordings are available at http://www.agmanager.info/news#ksrn-radio-interviews .
Keeping accurate records, and benchmarking with those records to identify strengths and weaknesses, will help you focus your management efforts. Your records can help you identify and manage production costs, provide a starting point for market planning, and give you the opportunity to understand your farm business better than anyone else. Your investment of time into this process is important as you seek to manage the current environment successfully.
Clay Simons - South-Central KFMA Economist
It is no secret that Kansas farmers and ranchers have been experiencing a cash flow crunch over the past several years. Low commodity prices and average yields across most of the state have depleted cash reserves, causing the working capital available to farming and ranching operations to decrease, making it more difficult for the average Kansas farm to cover current cash expenses. There are several ratios available from the KFMA data that illustrate this trend providing some indication of how Kansas farmers and ranchers are dealing with this issue.
There are several different ways of measuring liquidity, or the ability of a farm business to take care of cash obligations during the current business year. Working capital, which is simply a business’s current assets less its current liabilities, is a simple measure of the cash available at a point in time to meet cash obligations. While this number can be helpful to an individual farm business, it is hard to compare to other operations due to different sizes and types of farming operations. Because of this, ratios have been developed to take scale out of these numbers and allow comparisons across farms of various sizes and types.
The current ratio, which is current assets divided by current liabilities, is commonly used to judge a business’s ability to cash flow. It is recommended that this ratio be 2.0 or higher, with a larger ratio indicating a better overall ability to meet cash obligations.
Another measure of liquidity is a working capital ratio where the difference between current assets and current liabilities are divided by another measure. One way of computing this ratio is to compare working capital with the gross revenues of the operation. A second method is to compare working capital with total operating expenses of the farm, including interest. With this ratio, a larger number is better. Assessment of this ratio gives the producer an indication of the percentage of annual operating expenses that can be covered with current working capital, before needing to either turn some of the current year’s production to cash or to draw additional funds on a line of credit.
Table 1 shows the working capital, current ratio, working capital ratio and debt to asset ratio for KFMA members going back to 2012. The current and working capital ratios peaked in 2013, while dollars of working capital peaked in 2014. This followed several exceptionally profitable years for Kansas farms and ranches. The average farm during that period could cover 92% of their current operating expenses with their current assets on hand at the beginning of the year.
Table 1. KFMA Data 2012-2017
Working Cap Ratio
Debt to Asset
However, as net incomes dropped in 2015 and 2016, available working capital has begun to decrease. As producers see their liquidity decrease they must adjust to new financial realities. In 2017, the current ratio was 2.11, which is still reasonably strong while much lower than the peak of 3.19 in 2013. The working capital ratio shows that the average farm could only cover 64% of their current operating expenses with the current assets on the balance sheet as 2017 drew to a close.
It is interesting to note that between 2012 and 2017, the debt to asset ratio of the average KFMA farm remained relatively constant, ranging from a low of 0.218 to a high of 0.230. This indicates that the typical member has equity to work with in these challenging times, and has been able to refinance short-term debt into mid- and long-term debt to maintain cash flow. Of course, this use of equity can only be maintained for so long if cash flow continues to be an issue and if land values decrease substantially. If the farm economy improves, producers should take steps to strengthen their current financial position. If the struggling farm economy continues, many farmers and ranchers will have to make some tough decisions.
Bryan Manny - South-Central KFMA Economist
The annual KFMA ProfitLink Analysis reveals improvement in accrual net farm income in 2017 on a statewide average. The average statewide accrual net farm income in 2017 was $62,944 compared to $46,717 for 2016. The range of net income around the state was from the low in the North Central association at $28,950 to the high in the Southeast association at $102,671. One of the major factors for the $102,671 would be the amount of soybeans produced in the southeast association along with a strong soybean price in 2017.
As in 2016 and 2015, the 2017 average net farm income of $62,944 did not cover the average family living expenses and income taxes of $84,436. Thus, the last three years of family living expenses and income taxes had to be supplemented by non-farm income.
There is much net income variability within the KFMA farms. The high net income farms (25%) showed a positive accrual net farm income of $256,302 versus the low net farm income (25%) having an accrual net loss of $76,110.
The total expense ratio of the average statewide KFMA farm was .8925. In other words, it required $89.25 of expenses to create $100.00 in value of farm production. The remaining $10.75, the net farm income, is needed to cover principal payments on debt, family living expenses and income taxes.
As in recent years, cash flow and profitability are important. Positive cash flow is needed to maintain financial stability as in any other business or industry. There are short-run and long-run financial measures that are analyzed for future survival. In the short-run, one measure is the current ratio. This is the ratio of current assets divided by current liabilities. Since 2013, the ratio has decreased from 3.19 to 2.10. Thus, liquidity has decreased and this trend will continue until accrual net farm income increases to cover annual debt obligations, family living expenses and income taxes. Closely related to the current ratio is the financial measure of working capital. Working capital is the difference between current assets and current liabilities. Needless to point out, net working capital has decreased in the last three years. If a farm cannot meet its current obligations with current assets, it will be forced to liquidate its noncurrent assets, or income producing assets, to pay off its current obligations. Another option is to refinance some of the operating loan(s) into an existing, or new, term loan, to reduce the current payment obligations. In 2016 and 2017, this was a solution for some farm managers as the equity on farms remained strong and interest rates were still historically low. However, spreading out payment obligations will only solve the working capital problems if cash flow can increases in the future.
The financial outcome in 2017 was affected not only by low commodity prices on a statewide basis, but also by low yields on a regional scale. Drought conditions were an issue in the last half of 2017 and continuing into 2018. For the average KFMA farm in 2017, the government program payments received were $27,689, which was 44% of the net farm income of $62,944. Thus, without the government program payments, the net farm income would have been $35,255. The impact of government payments varied among the regions of the state, from 17% of net income in the southeast area to 124% in south central Kansas, where government payments were $37,964 and net farm income was $30,517.
Overall, the average KFMA farm has retained a strong net worth in in spite of the lower cash flow. How many more years in the future can the equity remain strong with the lower profitability? Perhaps 2018 will answer this question.
Aaron Meisenheimer - South-Central KFMA Economist
For three years now, Kansas farm families have been weathering the most recent economic downturn. While there remain many unknowns, this storm will eventually end, and, with it, opportunities of growth will return. However, like most storms, there is always an aftermath that must be cleaned up before any true rebuilding can begin. For many farms, that will probably mean cleaning up debt and equity issues. The beauty of KFMA’s analysis summary is that it gives farmers the data to identify such issues. Within this data, sometimes the best identifiers of an operation’s health lie within simple factors. By comparing them to other structural components, it is possible to discover areas of inconsistency and instability, or smaller underlying issues, that could grow into major factors in the future.
One such area to note is farm debt in relation to net farm income. Over the past 50 years, farms have seen their net income rise and fall to levels that many never imagined. Likewise, debt tends to follow suit by reflecting potential growth or struggles within the farm. Together a ratio of their relationship can tell a lot about a farm’s debt repayment capacity. The debt outstanding to net income ratio reflects how much debt a farm is leveraging in relation to one year of income and how long it would approximately take to repay such debt if circumstances remained constant. If, for example, a farm has a high debt to net income ratio, it means more and more future income must be committed to debt payments rather than to future expansion, reinvestment, or even increased standard of living.
Looking at a little a bit of the state’s history, over the past 50 years Kansas farms has seen debt to net farm income averages fluctuate quite a bit. During the 1970’s the debt to income ratio hovered around 5.0 to 1, meaning if all net farm income could be used to service existing debt at that time, it would have taken 5 years of net income to pay it off.
In the 1980’s the state saw this ratio climb higher (15.7 to 1) as farms struggled through that period’s farming crisis. Following this period was a time of consistency as farmers rebuilt their operation under more stable conditions. As the farm economy picked up in the 2000’s and early 2010’s, net farm income jumped significantly. While this additional income provided farmers the opportunity to service their farm debt, many chose instead to grow their operation with borrowed capital, thinking net income levels would remain high for a sustainable period, causing debt to jump proportionally. So, when the state’s farm economy took its most recent downturn beginning in 2014-15, farms were already carrying a sizable debt load. When you look at the data graphically (previous page), debt sharply jumped as farms took out a significant amount of loans on top of their other liabilities to make up for lack of income.
The debt to net income ratio currently sits around 10.3, an improvement from 2016 (13.04), as farm income has rebounded a little. Visually the numbers tell a deeper story as it appears debt has not yet leveled off. If this trend continues, farms around the state may struggle to meet debt obligations in the coming years as the spread between net income and debt is the largest it’s been since the 1980’s. This spread will hamper any future rebuilding projects farms undertake. The question many farms are now facing is, when will net income reach a level of capacity to manage the current level of debt outstanding? Hopefully the answer is sooner rather than later. Until then, farms should continue to evaluate their management records to best help them navigate through this tough economic time.
Amy Boline serves KFMA members in the Northeast association. A native of Northeast Kansas, she grew up on a family farm and attended high school at Northern Heights outside of Allen. Amy is also a K-State alum. She graduated with an Agribusiness degree with a minor in Business. Afterwards, she studied Agricultural Economics at Oklahoma State University while serving as a Graduate Teaching Assistant. She joined the KFMA Northeast team after finishing her thesis on feeder cattle auction pricing components and graduating with a M.S. degree. When she isn’t helping farmers and ranchers, Amy enjoys the great outdoors. Her favorite past-times are hiking, camping, and live music. Most often you will find her alongside her faithful Great Dane, Albert. Great Danes are the official dog of Pennsylvania. One look at Amy and Albert’s holiday postcards and you will see why Amy and the whole state of Pennsylvania are fans of this regal dog breed. Although Amy never would have predicted she would become an Ag Economist as a child, she deeply enjoys helping people, visiting producers, and bringing solutions to their farms. Recently, Amy started her third year with KFMA. If you see her and Albert at the office or cruising around Holton, say hello and ask them about the latest trail they’ve traversed. A friendly conversation and dog treats are always welcome.
Dillon Rapp serves Southeast KFMA members as Agricultural Economist based in the Chanute office. He recently celebrated one year of working at KFMA and serving members. Previously, Dillon attended Oklahoma State University where he earned a Bachelor’s Degree in Agricultural Economics and Accounting and an Master’s in Agricultural Economics. While there, he learned about KFMA and the work our Agricultural Economists perform for farmers and ranchers across the state. At OSU Dillon met and married his wife, Raney, who is an editor at a local agricultural publishing company and runs raneydayphoto.com in her spare time. Dillon and Raney are outdoor enthusiasts that enjoy hiking, fishing, hunting, camping, and weekend trips to see family and scenic locations. Growing up in Marionville, Missouri, home of the white squirrels, Dillon experienced the ins and outs of life on a small commercial cow-calf operation. His favorite aspects of working for KFMA are developing deep relationships with members and using his skills and abilities to help Kansas farmers and ranchers. The next time you see Dillon be sure to ask him about his latest outdoor excursion and the scenic beauty of Southeastern Kansas.
The following research articles can be found on the KFMA webpage (www.AgManager.info/kfma/research-articles) or look under “KFMA Research”. Each newsletter will feature new publications that are available.
Jeffery Williams – K-State Agricultural Economics, Jason Bergtold – K-State Agricultural Economics, Elizabeth Canales – Mississippi State Agricultural Economics, Noah Scrimsher – K-State Agricultural Economics Undergraduate Student
No-tillage is a common conservation practice on many farms in Kansas and likely one of the first in-field conservation practices to be adopted by farmers. An intensification of this practice would be to move from using no-tillage for a specific crop to continuous no-tillage, where no-till is used for all crops in a rotation. Adoption and intensification of tillage practices is based on the perceived benefits and costs from the practice. This article examines the outcomes resulting from using continuous no-tillage practices by farmers in Kansas..
Gregory Ibendahl - K-State Agricultural Economics
Dr. Ibendahl has added numerous papers to the AgManager.info website. In one article Gregg examines farms by quartiles based on debt to asset ratio to determine the level of risk for farmers in the KFMA program. Another article takes a look at the same topic from a different angle.
Currently, the median debt-to-asset (D/A) ratio for all farms in KFMA is 20%. While this number is usually considered very good, half the farms have higher ratios than this. The median value has no way to show the variability of financial risk that some farmers have, so other ways of examining the D/A ratio are needed. This article examines the quintiles of the D/A ratio to see how much variation there is in the debt level of Kansas farms.
Currently, interest rates are historically low. What affect does this have on Kansas agricultural producers? Dr. Gregg Ibendahl looks to answer this question by analyzing KFMA debt capital levels, farm profitability, and a comparison of on-farm interest rate to Bank Prime Loan Rate based on Federal Reserve Bank and data.
2018 Risk and Profit Conference
August 16-17, 2018: Manhattan, KS
An annual conference hosted by the Department of Agricultural Economics that provides an opportunity for key agricultural decision makers to interact with each other and with faculty on important topics in agriculture. For more information visit: http://www.agmanager.info/risk-and-profit-conference
2018 Ag Lenders Conferences
October 9, 2018 - Garden City, KS
October 10, 2018 - Manhattan, KS
K-State’s annual Agricultural Lenders Conferences are designed to provide the Kansas financial community with updates on current agricultural topics.
More information: http://www.agmanager.info/events/ag-lenders-conferences
2018 Kansas Crop Insurance Workshop
November 1, 2018 - Salina, KS
This one-day workshop will help crop insurance agents, agricultural lenders, farmers/ranchers, and other financial consultants provide better risk management information and advice to their clients or apply to their farm-ranch.
More information: http://www.agmanager.info/events/kansas-crop-insurance-workshop
2018 Kansas Income Tax Institute
Eight locations between October 30 - December 13, 2018
These two-day tax seminars provide continuing education for tax professionals as well as individuals wanting to better understand tax law.
More information: http://www.agmanager.info/events/kansas-income-tax-institute
For more information about these and other events, visit http://www.agmanager.info/events/ or contact Rich Llewelyn at firstname.lastname@example.org or 785.532.1504. Other events hosted by the Department of Agricultural Economics can be found at http://www.ageconomics.k-state.edu/events/index.html.
Vision: The Kansas Farm Management Association (KFMA), through its affiliation with K-State Research and Extension, will be the valued and trusted provider of integrated data management systems to apply critical thinking and strategic business planning for farm and ranch decision makers; and will be the premier source of farm-level economic data in the world.
Kansas State University Agricultural Experiment Station and Cooperative Extension Service K-State Research and Extension is an equal opportunity provider and employer. Issued in furtherance of Cooperative Extension Work, Acts of May 8 and June 30, 1914, as amended. Kansas State University, County Extension Councils, Extension Districts, and United States Department of Agricultue Cooperating, John D. Floros, Director. September 2016. Robin Reid & Tom Reust.