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August 27, 2018
During times of financial stress, no matter if it is agriculture or in the overall economy, it is good to have available cash to help weather financial downturns. Having working cash from profits or savings helps a business buy inputs or assets without large amounts of debt. Having less debt to make interest and principle payments on is important as interest rates are starting to slowly increase. Two commonly used financial analysis ratios used in agriculture are being affected by the lower farm incomes of the past four years.
According to the USDA, total US farm debt in 2018 dollars is at the highest level since 1984 (farmdoc.daily 8/17/18). One has to remember, land values, adjusted for inflation, are also at historic highs above the early 1980s levels. Agriculture has vastly increased asset values, which mostly offsets the rising overall debt levels. This is shown by the more gradual increase in the debt to asset ratio for US agriculture. The second commonly used analysis calculation is the current ration that is calculated by dividing current assets by current liabilities. This is the best measure of liquidity for a farming operation. In a study of Kansas farms completed by Langemeier and Featherstone (farmdoc.daily 8/10/18), the current ration peaked in 2012 at 4.26 and has declined to 2.76 in 2017. During the same time frame, the number of farm operations with a current ratio below 1.0 went from 5.8% to 12.6% in 2017. This indicates that 1 in 8 farm operations in Kansas have a negative cash flow situation.
Overall, US agriculture is in a strong but weakening financial position due to lower farm incomes. Trouble mainly arises, as it did in the 1980s, for individual farm operations that have too much debt and not enough cash assets. These are the operations that may have trouble refinancing at the end of this year or who have to liquidate an asset to shore up financial condition. Everyone is closely watching this year' harvest and commodity prices to gauge what comes next in farm operation finances.
Senior Vice President - Real Estate Operations
|Category: Agricultural Real Estate News|