How Liquid Are Our Farmers?

Published on: 17:37PM Jul 06, 2015

I was browsing the latest publication from the Kansas City Federal Reserve on the Farm Economy.  Nathan Kauffman released a report on June 25, 2015 titled "Today's Corn Prices, Yields Look Like 2009".  Although the gist of the article detailed how corn prices and yields for 2015 look very similar to 2009 (at least until the last week), the part I focused on was chart 2 showing the current ratios of farmers by age for 2012 and 2013 compared to a 1996-2006 average.

During the ten-year average, the current ratio for all ages was near the 2:1 level.  The current ratio compares the total current assets (cash, accounts receivable, inventories and prepaid expenses) divided by total current liabilities (farm operating line of credit, accounts payable and accrued liabilities plus the current portion of long-term debt that is due this year).  Normally, the higher this ratio the better.

During 2012, these ratios exploded higher especially for older farmers.  Farmers between age 45-65 saw their current ratio grow from about 2 to slightly more than 4 and for those farmers older than age 65 saw their current ratios jump to 8:1.

During 2013, the current ratio for farmers over age 65 saw their ratio fall back to 5:1 and for almost all other farmers, it fell back to the 2:1 area.  I have a feeling that the current ratio for 2014 data will show even a greater reduction in the ratio. 

Liquidity is the lifeblood of a farm financial structure.  It is like oil in an engine.  If you have a enough of it, the engine runs well and you have access to all of the horsepower.  If you run out of it or don't have enough, the engine either runs at a lower capacity or finally seizes up and stops running.  If a farm runs out of liquidity, then the overall farm operation will be like the engine with low or no oil.

You can add more liquidity by any combination of the following:

  • Appropriate mid/long-term borrowing on equipment or land,
  • Net income that is retained by the operation,
  • Sale of long-term assets,
  • Equity infusion by current/new owners

How does your operation compare to these trends.  Don't wait to long to fix it.