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Working Capital Trends Still Positive But Turning Negative

Published on: 23:17PM Jul 06, 2016

~~FarmDoc Daily from the University of Illinois just posted an article on Kansas farmer's working capital trends.  One ratio that we financial advisors look at for farmers is the amount of working capital divided by annual farm production.  Working capital is composed of your current assets (cash, receivables, inventories and prepaid expenses) less your current liabilities (accounts payable, accrued expenses, operating line and principal payments on long-term debt due this year).   For Kansas farmers before 2009, this ratio hovered around .6 to 1.  This meant that if their total annual production was $100,000, they had about $60,000 of working capital on hand.

Beginning in 2009, this ratio started to increase rapidly.  It jumped from .6 to .8 in 2009, then increased from .8 to 1.15 during 2013 to 2015.  Although 2015 was not a great year in farming, the reason for the increase was a drop in working capital averaged $27,000; however, the average value of farm production dropped by about $102,000.  Ratios can be good, but it does not always mean your farm is in better shape this year than in prior years even with a "better ratio".

The current ratio (current assets divided by current liabilities) during the 20 year period averaged 3.55:1.  It hovered in the 2.5:1 range until about 2006 and then increased and peaked out in 2012 at 5.40:1.  Since then, it has gradually dropped until it hit 4.08 in 2015.

To determine stress levels of farmers, they plotted the percentage of farmers who had working capital lower than .2:1 or .35:1.  Back in the mid 1990s the percentage in the .2:1 or lower category ranged between 15-28%: however, beginning in 2009, this dropped to less than 10% where it remained under that level until 2015 when it reached 11.3%.  The percentage went up substantially in 2015, however, it is still much lower than over the last 20 years.

The bottom line is that most farmer's balance sheets appear to be much healthier than 10-30 years ago, however, the trend has turned and the result for 2016/2017 may be worse than this article may indicate.