What is in this article?:
- Think about farm profit and loss, liquidity benchmarks
- Liquidity ratios to watch
There’s an old saying: “Pay attention to what you measure.” Today, measure liquidity ratios instead of paper wealth from land value appreciation and Section 179 tax deductions.
While all of the ratios cited here are key to rating your financial health these days, the top three favored by Michael Langemeier, director of cropping systems and farm management specialist at Purdue’s Center for Commercial Agriculture, are:
- Operating profit margin ratio
- Asset turnover ratio, or Rate of return on farm assets
- ROI, or Return on investment
He likes them because they are interrelated.
One helpful online tool is table 5 at
As the heydays fade, cash is king. Track your liquidity with the same scrutiny that you do land prices. Out with net-worth thinking and in with operating-statement scrutiny. Out with (IRS code) section 179 tax deduction thinking and in with real profit and loss thinking.
Your land costs are probably locked in for this growing season, but examine these ratios and business-productivity measures that reflect your true financial health, not your paper wealth. Land-price appreciation is misleading because it does not pay the bills, says Michael Langemeier, director of cropping systems and farm management specialist at Purdue’s Center for Commercial Agriculture.
Here are concrete liquidity-related tools that reflect your bill-paying ability in leaner times.
The average corn/soybean grower now operates at or near breakeven, based on corn and soybean price projections, notes Gary Schnitkey, University of Illinois farm-management Extension specialist. Corn prices in particular are falling more rapidly than are related inputs, he says.
Be sure not to incur debt on things having low payback, Langemeier advises. “Don’t use your precious working capital unless it makes you money.”
The farm-management Extension veteran focuses on whole-farm profitability benchmark measures in the table that follows. “Input expenses always merit scrutiny, but, for the most part, most farms already closely monitor these items,” Langemeier adds. “Labor-productivity and machinery investment ratios are high-priority considerations that lie within your control, but are often not as closely scrutinized as seed, fertilizer, and agricultural chemical costs per acre.”