Long-Run Trends in Profitability and Farm Size

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Long-Run Trends in Profitability and Farm Size

• Michael Langemeier
• Dept. of Ag. Econ.
• Kansas State University

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Introduction

• Three concerns revolving around current credit
  crisis
• Financial Stress
• Negative Return on Equity
• High Debt to Asset Ratio
• Divergence of Farm Performance
• Government Bailout

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First ConcernFinancial Stress

• Even with the strong financial performance of the
  last couple of years there are still a
  substantial number of farms with either a
  negative return on equity, a high debt to asset
  ratio, or both.
• Upcoming Slides
• Current financial position
• Vulnerabilities
• Financial stress

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Trends in Net Farm Income
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Financial Efficiency Measures
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Non-Irrigated Crop Enterprises
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Cow-Calf Enterprise
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Backgrounding Enterprise
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Trends in Liquidity
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Trends in Liquidity
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Trends in Solvency
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Potential Vulnerabilities in 2009

• Input price increases
• Farmland value volatility
• Overall debt structure and solvency of some farm
  businesses
• Access of farm households to credit
• Off-farm income during a national recession
• USDA-ERS, December 2008

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Financial Stress

• The USDA-ERS defines vulnerable farms as those
  with a negative net farm income and a debt to
  asset ratio above 0.40.
• U.S. Farms, 2007
• 3.5 of farms are vulnerable
• KFMA Farms, 2007
• 6.8 of farms are vulnerable

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Financial Stress

• Financial stress is often measured by examining
  farms with a negative return on equity and a debt
  to asset ratio above 0.70.
• KFMA Farms, 2003 to 2007 Averages
• Negative Return on Equity 40.33
• High Debt to Asset Ratio 13.04
• Financially Stressed 7.03

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Profit Margin Ratio
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Financial Stress
Measure Average Benchmark
Negative ROE 40.33 0.37
High Debt 13.04 7.41
Financial Stress 7.03 0.37
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Financial Stress
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Second ConcernDivergence of Farm Performance

• Recent thesis by Lindsey Snider
• KFMA Data
• Five-year snapshots from 1973 to 2007
• Data sorted into deciles using value of farm
  production
• Variables
• Total Acres
• Economic Total Expense Ratio
• Operating Profit Margin Ratio
• Asset Turnover Ratio
• Percent Income from Livestock
• Changes in economies of size

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Total Acres
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Economic Total Expense Ratio
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Operating Profit Margin
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Asset Turnover Ratio
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Percent Income from Livestock
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Economies of Size

• Five-Year Snapshots
• 1973 to 1977
• 1978 to 1982
• 1983 to 1987
• 1988 to 1992
• 1993 to 1997
• 1998 to 2002
• 2003 to 2007

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Changes in Economies of Size
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Third ConcernGovernment Bailout

• What is the Real Cost
• of the Great Bailout
• of 2008-2009???

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Possible Impacts

• Inflation
• Interest Rates
• Social Security and Medicare
• Economic Freedom
• Government funds typically come with strings
  attached
• Government dominated economies tend to have
  slower economic growth

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Contact Information

• Michael Langemeier
• mlange_at_agecon.ksu.edu
• Ag Manager Contributor site
• KFMA Newsletter
• Credit Crisis References