Road Warrior

What is Happening with Working Capital?

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At a recent Farm Credit University face-to-face meeting, Ronnie Hucks of AgFirst Farm Credit Bank asked me, “What is happening with working capital?” Let us dig deeper into his question building upon the data summaries provided by the combined databases of the Minnesota farm management education programs.

Data on approximately 1,200 farms in the database finds the working capital to gross revenue ratio on average is 36.8%. From my view, this would be considered very strong, and much improved since the year 2000.

Liquidity, measured by working capital to revenue, increased as net farm income increased. The low 20% of farms measured by net farm income had a 15.3% working capital to revenue, while farms in the mid-range of profitability maintained an average of 33%. The top 20% of net farm income producers reported an average of 43% working capital to revenue. The bottom line was as profitability increased, farm balance sheet liquidity ascended, as well.

Did the proportion of working capital vary by farm enterprise? Drilling down deeper, finds crop and beef farms averaged the highest working capital to revenue at 49%. The next questions would be:

  • Is the working capital protected by marketing and risk-management programs on inventory?
  • What are the quality of receivables and contracts along with the prepaid expenses?
  • What portion of the working capital is cash?

Analysis of the data found that dairy producers reported the lowest working capital to revenue at 16%, followed by swine at 21%. When both swine and dairy farms reported that they sold crops, as well, the working capital percentage actually doubled.

Larger farms, measured by gross farm revenue, reported less working capital, while there was very little difference when the data was sorted by age group of producers.

Now for the big question: What about debt? Do producers who have more debt maintain more working capital? The answer was a resounding “no.” Farms with a debt-to-asset ratio higher than 80% had a miniscule 3% working capital to revenue. Those with over 60% debt to asset ratio had 18%; contrasted to less than 40% and less than 20%, which had 53% and 73% of working capital to revenue, respectively. Could this phenomenon fuel the next farm crisis?

 

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

Discuss this Blog Entry 1

on Oct 29, 2012

Negative working capital makes it much harder to keep moving forward with our businesses. When the going gets tough, we need to stay mobilized and keep putting one foot in front of the other. This is when the true entrepreneurial skills need to show their real colors and this may require reaching down deep within to keep up personal momentum.
James from http://islandloans.co.uk/

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Dave Kohl is an ag economist specializing in business management and ag finance. He can be reached at sullylab@vt.edu.

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