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Big Farms are Most Vulnerable

January 30, 2013
By: Ed Clark, Top Producer Business and Issues Editor
p38 Big Farms are Most Vulnerable
Today’s farmers face increasing pressure to get bigger, but the added stress can topple some. Farm management experts provide tips for smart growth.  

Debt concentrated on $1 million-plus operations

Which farms are most vulnerable should the ag economy spin lower, either from a major drop in crop prices, lower land values or both? A) Small farms; B) Medium-sized farms; or C) The nation’s largest farms by sales type? If you guess C, you are absolutely correct.

Large-volume producers are more likely to go out of business than any other sales category, although only a small percentage are truly at risk right now. For those who are vulnerable, it has less to do with management ability, weather, production or marketing.

"Large-scale producers are in reasonably good shape right now, as a group, but farmers in the late 1970’s thought they were in reasonably good shape, too.

It really boils down to finances because on a percentage basis, this group of producers carries more debt; they’re more highly leveraged. To go from 3,000 to 10,000 acres, 2,000 to 5,000 sows or 300 to 1,500 dairy cows, takes big money and much of it is borrowed. Moreover, as a group, the majority of farmers who have purchased high-priced land in recent years and are looking for more are largevolume farmers. In years such as 2011 and 2012 this creates a windfall, given record prices, but on the flip side they have less room to move in a downturn.

For example, the debt-to-asset ratio of Kansas farms with sales of $500,000 to $1 million, and more than $1 million, was 28% in 2011, higher than all other classes. Those with $100,000 to $250,000 in sales had a ratio six percentage points lower, 22%. That’s using Kansas Farm Management Association (KFMA) data. USDA data for Kansas show a far greater spread from higher to lower sales classes.

"They’re (large-scale producers) in reasonably good shape right now, as a group, but farmers in the late 1970s thought they were in reasonably good shape, too," says Allen Featherstone, a Kansas State University ag economist who is quick to add that he does not predict a downward spiral in either commodity prices or land values.

Featherstone’s biggest surprise from the study is the debt-to-asset ratio of Kansas farmers is higher today than it was in 1979 (see "Are Black Swans on the Horizon," September 2012 issue), with a disproportionate amount of that debt held by the largest farms. The mean debt-to-asset ratio in 1979 was 24.6% and in 2011 it was 25.5%

"It’s not necessarily growth that is of concern, but the speed of that growth that can be problematic."

However, the percentage of farms with more than 40% debt to assets in 1979 was 19.4% and 23.3% in 2011. The percentage of farms with more than 70% debt to assets in 1979 was 1.3% and in 2011 it was 5.7%. It’s sobering to think about, but in 2011, the farms with more than 70% of debt to assets more closely match the percentage in 1981 than 1979.

$5 Million Club Risks Are Up. The probability of default has generally decreased in recent years for each of the sales classes, except for those farms with sales of more than $5 million. Risk for this group actually increased from 1996 to 2010. Risk didn’t increase because of commodity prices but because debt has risen.

Using KFMA data, Featherstone indicates that fewer than 2% of large-scale producers (more than $1 million in sales) are at risk of default, less for other categories. The only years with less risk of default were ‘73, ‘74, ‘75 and ‘79; however, the risk changed rapidly from ‘79 to ‘81, illustrating that low numbers one year are not necessarily safe for the next.

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FEATURED IN: Top Producer - February 2013

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