Farm with ghosted money

Despite the recent challenging years in agriculture, Illinois farmers have a relatively low ratio of debt to assets, University of Illinois agricultural economist Gary Schnitkey said.

“We are not in a solvency crisis,” agreed fellow University of Illinois ag economist Nick Paulson at a farm finances webinar offered by the university’s Department of Agriculture and Consumer Economics on Aug. 28.

The observations come from data compiled by the Illinois Farm Business Farm Management program. Data from about half of the 5,500 farms in Illinois is used. There is some lag time — this information comes from 2019 data, before the pandemic.

In 2019, the average farm income went down 48% from $137,704 in 2018 to $71,115 in 2019, said Brad Zwilling, FBFM field staff. In all, 90% of the net income came from federal payments, including the Market Facilitation Program, livestock payments and Conservation Reserve Program, he said.

Net farm income as a percentage of gross income fell from 35% in 2011 to 8.1% in 2019, Zwilling said.

Paulson said older grain farmers who own their own land are in the best position. Not surprisingly younger grain farmers, often those with higher cash rents, are in weaker positions.

Farmers age 60 and higher have about a 10% debt-to-asset ratio. Some of the youngest farmers in the FBFM program are at about 50%. About 60% of farmers have less than a 30% debt-to-asset ratio, Paulson said.

He also noted the average age of participants was between 58 and 60. Over half of the operators are above age 60.

“Younger farmers are in more vulnerable positions in terms of relative debt to assets,” he said. The current situation is “more of a liquidity issue.”

Livestock producers, especially hog and dairy, have tighter cash flows now, and it looks like that will continue, Schnitkey said.

Grain farms are generally doing best on liquidity and have for the last five years, Paulson said. They have the benefit of increases, or at least stability, in land prices, he said.

The FBFM data shows family living expenses are coming down, he said. They hit a high in 2013.

“We all know those things are hard to bring down,” Schnitkey said.

While farmers are watching costs right now, some profitable investments can be made including tiling, storage on some farms and raising specialty grain in certain cases, he said.

Especially for young farmers, it is important to generate cash. That might be from seed sales, raising livestock, custom farming or off-farm businesses. He advised being cautious with livestock and custom harvesting because they can also be a cash draw in some cases.

A clear advantage to off-farm jobs is getting health benefits, he said, while noting that during the pandemic those jobs may be more difficult to find. That may continue, he said.

This is a year to look closely at cash rents, he said. That land may not be a money maker. This is difficult for young people because a farmer may want to expand to earn more revenue, but with the cost of rent, it might not be profitable, he said.

Operating loans are increasing, he said. In 2019 the average operating loan was $303/acre and is going up.

“These are growing, but not alarmingly so,” Schnitkey said.

Operating loans will continue to grow this year, especially for hogs and dairy, he said.

Working capital is declining “not at an alarming rate on average,” he said.

On the positive side, it looks like there will be good yields for many farmers this year. Prices are still low but a little higher than anticipated, Schnitkey said. He said while Illinois farmers hate to see the storms that affected Iowa crops, it may help prices if there is less supply.

Schnitkey focused his advice by age group:

Young farmers: Prioritize cash-generating activities which may not be grain operations. This group may be most likely to have working capital issues.

Middle-age farmers: Evaluate the financial performance of the business including specific tracts of land.

Older farmers with no heirs: Evaluate specific segments of farmland. For example, if cash rented land isn’t making a profit, consider letting it go.

Older farmers with heirs: It is a time to do succession planning, taking into consideration the young farmer, the retiring generation and non-family members.

“Those are tough decisions,” Schnitkey said.

Phyllis Coulter is Northern Illinois field editor, writing for Illinois Farmer Today, Iowa Farmer Today and Missouri Farmer Today.