May 29, 2013

Irrigation proved to be the difference between the "haves" and "have-nots" in farm income in drought-stricken 2012, according to a financial analysis of 111 Nebraska farm operations across the state.

"Crop farms with access to sufficient irrigation water were able to take advantage of excellent prices along with excellent yields," writes Tina Barrett, executive director of Nebraska Farm Business, Inc., in a recent UNL Cornhusker Economics article.

"These led to record-breaking net income per acre for both commercial irrigated yellow corn as well as irrigated seed corn in 2012."

Dryland farms in the analysis group didn't fare as well.

For the first time in 10 years, drops in net returns per acre went into negative numbers. Dryland wheat was the exception as its harvest occurred early in the drought.

Each year Barrett reports on the financial health of farm and ranch operations served by the NFBI financial analysis services. This year's report covers 111 operations.

Overall, net farm income in this group fell 8% in 2012, though it was still the second highest average on record.

For 15% of the farms studied, accrual net income exceeded $750,000. Yet for another 15%, net farm income was negative.

"This is the first time in several years that a significant amount of farms lost money," Barrett said.

Many of the farms that lost money had a significant livestock operation or dryland crop operation. Some farmers lost money due to risky marketing strategies that caused significant hedge account losses.

For a group of farms labeled as Top Efficient Farms, the $527,450 in average net income was an all time new high. This was $100,000 higher than in 2011.

"The major change comes in the form of their operating expense ratio, which is just 51.3% for the Top Efficient Group and 65.1% for the whole group," Barrett said. "The ability to consistently control costs, even when it's not 'necessary,' keeps these farms retaining 16.2% more of every dollar of gross income."

Input costs also increased. It cost over $730 per acre to raise corn, a $100 increase from 2011. That translates into an average cost per bushel that rose from $3.95 in 2011 to $4.45 in 2012. However, many producers are well above or below this average, Barrett noted.

Although net worth continues to increase, total debt also is increasing. From 2011 to 2012, the increase in debt was just over $125,000 per farmer in this reporting group. The biggest increase was in long-term liabilities.

"The debt increase is not necessarily a bad thing," said Barrett, "but if profits tighten in the future, especially without a drop in family living costs, there will be a major 'squeeze' on the amount available to make the payments on this rapidly increasing level of debt."

The future is uncertain.

"What we do know is that we've had seven years of great prosperity in Nebraska and it has improved the health of the average Nebraska farm," Barrett said. "Hopefully it has been enough to withstand a few tough years when we're faced with them."

The study represents 111 farm operations, characterized by the following demographics. (Individual categories do not add to 100% due to rounding.)

• Type of farm defined by enterprise contributing more than 70% of gross farm income:  crop, 72%; hog, 2%; beef, 3%; crop and dairy, 3%; crop and hog, 4%; crop and beef, 14%; and other, 3%.
   
• Gross farm income: less than $100,000, 1%; $100,001-$250,000, 5%; $250,001-$500,000, 13%; $500,001-$1,000,000, 38%; and over $1,000,000, 43%.
   
• Debt-to-asset ratio: less than 20% ratio, 41%; 20-40% ratio, 35%; 40-60% ratio, 19%; 60-80% ratio, 2%; and over 80% ratio, 3%.

Nebraska Farm Business, Inc., provides financial services to help Nebraska's farms and ranches remain profitable and competitive. Established in 1976, it originally was part of University of Nebraska-Lincoln Extension.

Heather Haskins
Student Writer, IANR News