Could your cash rent situation be hurting your cash flow? Maybe. According to an article in farmdoc daily, the more cash-rented land a farmer has, the lower his or her liquidity.
Researchers at the University of Illinois looked at data from local Farm Business Farm Management groups in Illinois, assessing them for debt-to asset ratios and working capital. They split the producers into five groups based on their cash rent status:
- farmers with fewer than 25% of their land cash rented,
- farmers with 25% to 50% of their land cash rented,
- farmers with 50% to 75% of their land cash rented,
- farmers with 75% to 100% of their land cash rented; and
- farmers with 100% of their land cash rented.
“As the percentage of cash rent acres farmed increased, the current ratio (assets/liabilities) decreased,” writes lead author Brandy Krapf of Illinois Department of Agricultural and Consumer Economics at University of Illinois. “The relationship is more noticeable when comparing the under 25%, 25% to 50%, and 100% groups.”
According to Krapf, once the percentage of cash rented acres exceeds 50%, the ratios move closely together. Similarly to asset and liability ratios, working capital is negatively affected by cash-rented acres.
“When comparing the under 25%, and the 25% to 50% group, the average difference is about $90 [per acre] from 2003 to 2008,” Krapft writes. “From 2009 to 2012, the difference increased to about $130.”
There are additional factors that play into these findings, including the risk of higher cash rents in the futurue.
“Therefore, as the percentage of acres in cash rent increases, closer monitoring of the farm business is required to manage this risk to maintain liquidity, especially in these times of lower margins,” she writes.
What percentage of your land is cash rented? Let us know in the comments.