The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Evaluating the New Century Go-Go Farmer
Jul 31, 2013
Bob Craven, head of the Center of Farm Financial Management (FINPACK) for the University of Minnesota gave a discussion on evaluating the new century Go-Go farmer.
The Median income for 2012 for Minnesota farmers was a slightly less than $200 thousand, while the top 20% were almost $700 thousand of net income.
Top 20% characteristics:
- Gross Income - $2 million
- Assets - $5.6 million
- Acres farmed - 1,943
- Acres owned - 493
The bottom 20% of farmers grossing more than $1 million is net income of about $175,000, however, back in 2009, these same farmers lost about $212,000. Working capital dropped 8% in one year from about 14% to 6% and if the trend went one more year, they would be in a negative working capital situation.
The Go-Go Culture:
- Hard Charging
- Focused on Expansion
- Willing to Take Risks
- Gross Income is Close to Exceeding Gross Assets (everything is rented)
Liquidity is the first line of defense in this environment and collateral is second. Lenders would rather have the farmer cash flow then liquidate. The working capital to gross income is more reflective of the liquidity position than working capital.
Crop farms have built their working capital to gross income from about 25% to over 50%. Our crop farmers are very liquid while livestock farmers are still under about 20%.
The low-cost producer in Minnesota on cash rented ground is about $3.75 per bushel while the high cost producer was in the $5.70 per bushel range. What happens to these high cost producers when the spring price guarantee is $4. Will they be able to get a loan.
An example was a 10,000 acre Go-Go farmer with $5 million of net worth and about 15% of working capital. Assuming a normal 175 bushel yield with $6.25 price, the farmer would make about $800,000. However, if the price drops to $4.75 the profit drops to an $1.8 million loss and working capital is gone. This only takes one year.