Differences between working capital and gross farm receipts between farms • farmdoc daily

As of July 1, 2022 daily farmdoc article, the author explains working capital trends using data from the United States Department of Agriculture – Economic Research Service (USDA-ERS) to show trends for all farms in the United States. The article also highlights the substantial differences between working capital and gross farm receipts between farms. Using data from the Illinois Farm Business Farm Management Association (FBFM), this article will identify differences between working capital and gross farm receipts between farm types and by operator age in grain farms primarily in Illinois. Overall, the ratio of working capital to gross farm receipts decreased from 2013 to 2019, but has since increased.

Background

Financial guidelines for agriculture developed by the Farm Financial Standards Council (FFSC) have identified five general financial measures when evaluating the financial performance of the agricultural business. These include liquidity, solvency, profitability, repayment capacity and financial efficiency. Different financial measures have been identified and defined for each general group. Three metrics are listed to measure liquidity: current ratio, working capital, and working capital to gross revenue ratio. The financial analysis of some groups substitutes the value of agricultural production (VFP) for the gross farm income (GFR). The FFSC recognizes both calculation methods in its guidelines.

Using FBFM data, this article examines working capital versus gross farm receipts for selected producer characteristics. While the traditional measures of a farm’s cash flow, current ratio and working capital, have been commonly used measures historically, measuring working capital against gross farm income also takes farm size into account. Obviously, a large farm needs more working capital than a small farm to have the same level of cash. Moreover, the higher this figure, the better, i.e. stronger liquidity.

Working capital at GFR by type of operation

Figure 1 shows the median (50% of farms above and below) measure of working capital versus GFR by farm type. The four types of farms are hog, grain, dairy and beef farms as defined by the FBFM. Grain farms are defined as farms where the value of food consumed represented less than 40% of crop revenue. Hog, beef and dairy farms are defined as farms where the value of feed represented more than 40% of crop revenue and where the livestock enterprise (hog, dairy or cattle) received the majority of the value of the Food for animals.

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In general, GFR working capital decreased from 2013 to 2019 for most farm types. The 2012-2013 period marked the end of the era of high grain prices that began with the ethanol mandate and ended with the drought year of 2012. From 2013 to 2019, we saw financial deterioration in most farms as farm incomes declined. Since then, rising grain prices have led to increased farm incomes, leading to better returns for farmers and increased working capital.

Pig and beef farms seem to have more variability on this measure. This is because livestock price variability not only affects livestock sales for the year, but also has an effect on inventory values ​​that go into calculating accrued farm income. Finally, dairy farms have lower working capital at GFR than the other three farm types. The majority of a dairy farm’s assets are found in the dairy herd, an intermediate asset, and the buildings, a long-term asset. Dairy farms also benefit from a monthly income stream in milk sales that allows them to survive on lower cash.

Working capital to GFR on grain farms by age of operator

Figure 2 illustrates the median measure of working capital relative to gross farm income for grain farms by age of operator. The groups are divided into five different age groups ranging from under thirty to sixty and over.

Similar to GFR working capital by type of operation, all of these liquidity measures decreased from 2013 to 2019 and have since increased. For example, the ratio for the fifty to fifty-nine age group started at 0.50 in 2012, fell to 0.29 in 2019, and increased to 0.48 in 2021 or near the ten-year high in 2012. The decrease from 2012 to 2019 was a deterioration of about 42%, but has almost rebounded in the past two years.

On average, working capital is higher for farmers in the “50-59” and “over 60” age brackets than for younger farmers. Generally, older farmers are more established than younger farmers, which translates into better financial strength.

Summary

Data from the Illinois Farm Business Farm Management Association is used to examine a measure of farm liquidity, from working capital to gross farm income. Data from 2012 to 2021 sorted by farm type and age of producer was used. Grain farms generally had the highest ratio during this period with the least variability. Beef and hog farms were more variable. Regarding the age of the operator, generally the older the operator, the higher the ratio. Both groups posted a decline until 2019 and have strengthened since then.

The author would like to point out that the data used in this study comes from the Illinois Farm Business Farm Management (FBFM) Association. Without the Illinois FBFM, information as complete and accurate as this would not be available for educational purposes. FBFM, which consists of more than 5,000 farmers and 70 professional field staff, is a nonprofit organization available to all Illinois farmers. FBFM field staff provide on-farm advice as well as record keeping, farm financial management, business entity planning and income tax management. For more information, please contact our office located on the University of Illinois campus in the Department of Agricultural and Consumer Economics at 217-333-8346 or visit the FBFM website at www.fbfm.org.

References

Langemeier, M. “Trends in working capital.” daily farmdoc (12):99, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, July 1, 2022.

About Donnie R. Losey

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