Moneywise

September 1, 2010 04:37 AM
 

Debt Still High for Certain Producers

While the overall debt situation for agriculture has considerably improved, debt levels of a small subset of farmers remain relatively high, according to Jason Henderson, vice president and Omaha Branch executive with the Federal Reserve Bank of Kansas City. Larger farming operations, livestock operations and operations owned by young farmers have higher debt ratios and less ability to service debt than other operators.

One measure of the ability to repay debt is the debt repayment capacity utilization (DRCU) index, which takes into account debt obligations in relation to maximum debt repayment capability. A DRCU index below 100 indicates that the borrower has enough income to service the debt. Conversely, a DRCU index above 100 infers the borrower does not have enough income to service the debt.

Farming operations with annual sales up to $100,000 have a DRCU index below 15. In contrast, farms with annual sales between $100,000 and $5 million have an average index between 25 and 30, and farms with more than $5 million in annual sales have an index of 37. "Larger operations tend to be more capital-intensive, using more equipment than smaller farms," Henderson says.

Livestock operations also have higher debt use in recent years, due to shrinking profit margins. In 2008, hog farms had the highest DRCU at 47, followed by poultry at 44 and dairy and cattle operations at close to 40.

Operations owned by young and less experienced farmers have high debt levels because they are typically still financing the initial startup costs of a farm operation, Henderson says. In 2008, 56% of all farm enterprises headed by operators 35 or younger had debt, compared to only 19% headed by farmers 65 or older. Also, the debt-to-asset ratio was highest (21%) among farm operations headed by younger farmers.

"Still, overall farm debt levels remain near historical lows," Henderson adds. "And a rebound in farm profits should help bolster farm income statements and balance sheets." He’s still hopeful for a farm rebound, spurred by a global economic recovery that could open credit flows and foster additional investments back into U.S. agriculture. —Jeanne Bernick

By the Numbers I A quick look at debt levels for agricultural producers, by age and year

56% Farms with debt that are owned by operators who are 35 or younger

19% Farms with debt that are owned by operators who are 65 or older

60% Farmers who reported using debt in 1986

31% Farmers who reported using debt in 2007


California Rejects Farmworker Overtime

California’s Gov. Arnold Schwarzenegger recently vetoed a bill that would have given farmworkers overtime pay after eight hours of work in a day and 40 hours in a week. In returning Senate Bill 1121 without his signature, Schwarzenegger said the measure, "while well-intended, will not improve the lives of California’s agricultural workers and instead will result in additional burdens on California businesses, increased unemployment and lower wages." Businesses trying to compete under the proposed rules might have become unprofitable and gone out of business, resulting in further damage to California’s "already fragile economy," Schwarzenegger added.

"We’re grateful the governor vetoed the bill," says California Farm Bureau Federation spokesman Dave Kranz. "It would have reduced wages for individual farmworkers while adding complications for family farmers and ranchers." Kranz says farmers would have been forced to bring in additional workers, rather than pay overtime for those who had already worked eight hours. While federal law exempts workers employed in agriculture from overtime pay altogether, current California law made farmworkers eligible for overtime after working 10 hours in a day, or a 60-hour week. It’s the only state with a provision for daily overtime pay for farmworkers, Kranz says. —Catherine Merlo


Organic Agriculture Gains More Ground

T10128 chartThe number of certified organic crop acreage and livestock under organic management has rapidly grown during the past decade, driven almost entirely by consumer demand. Certified organic cropland increased 51% between 2005 and 2008, reaching more than 2.2 million acres. Today, certified organic acreage is more than 5 million acres, according to USDA.

 

California leads with the most certified organic cropland, more than 430,000 acres, largely used for fruit and vegetable production. Other states with the most certified organic cropland include Wisconsin, North Dakota, Minnesota and Montana. Still, U.S. organic crop acreage is only 1%, much lower than countries such as Switzerland (11%), Italy (9%) and Uruguay (6%).

The organic livestock sector has grown faster than organic crops, with the largest gains in organic dairy and egg production. Organic milk cows increased to more than 200,000, and organic layer hens to 350 million. —Jeanne Bernick

 


Subsurface Drainage Investment Analysis

Subsurface drainage is a long-term investment with substantial costs up front and the benefits spread over many future years, says Don Hofstrand, Iowa State University farm management specialist and co-director of the Agricultural Marketing Resource Center. As a result, the decision to put in a new drainage system can be tough to pencil through.

"The most difficult part of computing a tile investment analysis is estimating the yield response from the improved drainage," Hofstrand says.

The size of the expected yield improvement dramatically impacts the economic feasibility of installing tile drainage because of the potential profits. For example, a 10 bu. per acre yield response from corn and a 4 bu. per acre yield response from soybeans will provide an average annual return of $35 for corn at a price of $3.50 ($3.50 x 10 bu. = $35) and $36 for soybeans at a price of $9 ($9 x 4 bu. = $36).

Investment Analysis Methods. Below are two ways of computing the economic returns from investing in new subsurface drainage, according to Hofstrand. Read through these options to help with the decision process.

1) Payback Period. This is computed as the number of years required to repay the original investment in tile drainage. If the cost of installing tile drainage is $500 per acre and the expected annual net cash return in crop returns from tile drainage is $100 per acre, the payback period is five years ($500 / $100 = 5). The payback period does not take into account the "time value of money" from the time the tile is purchased until the returns are received (interest on the money). If money is borrowed to install the tile, the debt payment (interest and principal) is subtracted from the annual cash return and only the equity portion of the investment is used to compute the payback period.

2) Internal Rate of Return (IRR). The IRR is based on future cash flows, rather than future profits (return on investment). The $100 additional cash return spanning the lifetime of the tile is compared with the $500 tile investment and results in an IRR of 20%. If money is borrowed to install the tile, the debt payment (interest and principal) is subtracted from the annual cash return and only the equity portion of the investment is used in the computation. The IRR takes into account the period between the time of the investment and the future years in which the annual returns are received. The IRR is based on the concept of "time value of money," which assumes that money received now is of more value than money received at some point in the future. —Jeanne Bernick


Top Liners

"Eating is an agricultural act." Wendell Berry, writer

"Lenders are cherry picking who survives and thrives." Steve Johnson, Iowa State University ag economist

"Dreams will never be achieved if you don’t turn them into goals." David Sokol, CEO, MidAmerican Energy Holdings


Top Producer, September 2010

 

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