Stabilizing Your Farm's Financial Condition and Profitability February 22, 2017
Nationwide farm net income has fallen for the last three years and appears to be on trend to keep falling. Interest rates are likely to increase, as the economy seems to be warming up, resulting in increased borrowing costs and tighter credit conditions. Cash rents fell by nearly 11% on average-quality farmland in 2016 and are on a trend to continue in the coming year. In addition, many farms have decreasing amounts of working capital to make up for declining incomes and high costs of production. The decrease in working capital if unchecked can decrease the stability of an operation. With no real signs that commodity values will increase and the unpredictability of the future this situation, while not dire, warrants watching.
Net farm income and working capital are vital to keeping U.S. farms and ranches sustainable and healthy. While these two measures do not track the same thing, their measure of firm success and health are closely tied to each other. Net farm income (Profit) is the total earnings after expenses for the production year. This is reflected in the profit equation:
profit = total revenue – total cost
and is directly influenced by prices, productivity and costs. Working capital is the amount of capital an operation has remaining after subtracting the current 12-month liabilities from the current assets. Working capital is a way to measure an operation’s ability to meet its short-term obligations and handle risks.
Recent discussions with other agricultural economists, farm management experts and bankers has resulted in the identification of five topics considered important for producers when contemplating the stabilization of working capital for their farm business.