The ABA National Agricultural Bankers Conference in Minneapolis in mid-November was packed with information and networking opportunities, being truly international with participants from around the globe.
In my last article, perspectives concerning net farm income were presented utilizing FINBIN farm financial summary data presented by Center for Farm Financial Management Director, Bob Craven. Let us take the subject a little further concerning key financial data.
Bob presented a session on the hard-charging go-go farmers of recent years who are in an extreme growth mode. These fast-track hard-charging producers are focused on expansion, and willing to take risks, often renting and leasing assets. They have gross farm revenues approaching or greater than farm assets.
Where are these producers most vulnerable? No, it is not the debt levels as one would suspect. The debt-to-asset ratio is 38% for the top 20% of producers ranked by ROA, and just above 50% for the bottom 20% of producers. The area with the biggest vulnerability is net working capital, defined as those liquid assets that are cash or can be turned to cash without disrupting normal operations. The top 20% group exhibited median net working capital to revenue ratio of 52%. The bottom 20% group had 17% net working capital to revenue.
Other than financial liquidity, the other Achilles heel is that over 75% of the bottom 20% group were renting or leasing farm ground, while the top 20% had nearly double the amount of owned farm ground. In a negative cash flow situation, not only will the low group have less working capital to fall back on, but their ability to refinance losses using equity will be a limited option.
Will the hard-charging producers renting high-priced farm ground on multiple year contracts be the canary in the farm downturn coal mine? Only time will tell!