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Friday, August 28, 2015

Liquidity is Strength when Profits are Scarce, How Should it be Measured?

by Don Nitchie, Extension Educator

Liquidity has certainly become a hot topic that many people are monitoring in Agriculture with more than two years of significantly lower grain prices.  While livestock operations enjoyed strong returns in 2014 many crop only farms experienced negative returns.  Lower prices also impact the value of grain inventories held as current assets on balance sheets.  In some cases, current liabilities may have also increased as operating loans expanded after decreasing over past years of higher grain prices.

In this changing environment, we know that liquidity, or the ability of the farm business to meet its current financial obligations in the coming year is very important.  Strong liquidity also provides a business the ability to withstand short-term shocks and the flexibility to capitalize on opportunities.  But, what is the best measure of liquidity?  Frequently, the current ratio; current assets divided by current liabilities may have been used in the past to measure your liquidity.  Current assets are typically grain and marketable livestock inventories as well as some cash and prepaid inputs.  Current liabilities are typically annual operating loans and annual payments due on machinery, buildings and land loans. A ratio of 2:1 or above is good and 1.3:1 or below is considered weak.

However, while the current ratio is accurate in telling you the relationship on your balance sheet of your current assets to your current liabilities, it does not relate to your income statement and your size of business.  Many financial experts including the Farm Financial Standards Council now argue that the Working Capital to Gross Revenue measure is a much better measure of liquidity.  Working capital is equal to current assets minus current liabilities.  If Working Capital is 30% or more of Annual Gross Revenues, liquidity is considered strong.  If working capital is 10% or less of gross revenues it is considered weak.

As an example, consider a farm where the current assets are $200,000 and Current Liabilities or debt is $100,000.  This would make the current ratio 2:1, fairly strong by conventional wisdom.  The working capital of this farm is $200,000 -  $100,000 = $100,000.   If the annual gross revenue were $300,000, this means that working capital was 33% of gross revenue-strong according to guidelines.  But, if gross revenues were $1,000,000 annually the working capital would only be 10% of gross revenues and the liquidity situation would not be good.  It would be a struggle to meet current obligations.  So relating your liquidity to the size of your operation is important and should be monitored continuously.  Maintaining strong liquidity will help a farming business survive and thrive in challenging times.

Tuesday, August 4, 2015

Relationship between Corn and Bean Prices verses Land Values and Rents

By David Bau, Extension Educator

I receive many questions daily about land rents and land values and what direction they are going in the near future and long term.  Corn and soybean prices have fallen from record highs in recent years to a level that presents a challenge for farmers to generate a profit. I thought I would try to put together a chart that correlates the relationship between these three items.

I put together a list of average farmland values in Southwestern Minnesota from 1994 thru 2014 average Southern Minnesota cropland cash rental rates and average prices received by farmers for corn and soybeans sold each year.  Next I took the percentage yearly change for each and compared the results to each other in Table 1 below. The average change in land values is indicated by diamonds, the average change in Farmland Rental Rates is indicated by squares and the average change in corn and soybean prices is indicated by triangles.

Table 1.

From 1994 to 1995 all three had increases in values with corn & soybean prices increasing by an average of 32.9%, while farmland sales prices increased by 8.4% and farmland rental rates by 5.3 %.  In 1996 farmland sales prices declined by 1.3% while corn and soybean prices increased by 4.1% and rents by 7.9%.

In the last 20 years, there were seven years where corn and soybean prices were negative, while farmland sale prices and farmland rental rates were in negative territory three years.  Is there anything to learn from the chart? There is a trend between all three with corn and soybean prices the most volatile, followed by farmland values and with farmland rents more stable.  There is definitely a year or two lag in the reaction of farmland sales and rental rates following the direction in corn and soybean prices.

From 2013 to 2014 farmland sales declined by 10.7% and farmland rents declined by .9% while corn and soybean prices declined by 15.7%.  With corn and soybean prices in negative territory, this should indicate lower farmland sale prices and lower farmland rental rates unless prices go up dramatically in the near future.

Friday, July 31, 2015

Farmland Sales Decline Slightly in Minnesota in 2014

By David Bau, Extension Educator

Minnesota farmland sales for 2014 are available at Land Economics website thanks to University of Minnesota Professor Steve Taff who updated the information before his recent retirement.   Minnesota average sale price was $5,109 in 2014 down 1 percent from an average sale price of $5,165 in 2013.  The average sales price was $4,222 in 2012.  The Minnesota average for prior years was: $3,667 in 2011, $3,517 in 2010 and $3,420 in 2009.  The upward trend was broken slightly in 2014 the first decline in recent years.

Record corn and soybean prices and corresponding profits in recent years can explain the rapid rise in farmland sale prices.  Now much lower corn and soybean prices can explain the falling farmland sale prices as farmer profits have declined.  Since the June 30th crop report corn and soybean prices have moved higher but are still below the level for many farmers to reach their breakeven prices.

If you want to see what farmland sales took place in the county and township where your land located,  you can go to the Land Economics website.  Here you will find information by county or township from 1990 through 2014 at: then choosing Farmland Sales and selecting your counties you are interested in.

At this website you can find the assessors’ estimated market value data from last spring.  This lists the 2015 estimated values.  The data is provided by the Minnesota Department of Revenue staff.  Keep in mind that this represents estimates by the county assessors, not actual sales.  It can be found under the “Land Values” tab on the website.

The data can be broken down by township or by whole county and provides information on class 2a agricultural land values per acre, class 2b rural land value per acre, class 2a tillable value per acre, class 2b timber value per acre, class 2c timber value per acre, class 2a ag preserve value per acre, class 2b ag preserve value per acre, green acres market value per acre and green acres taxable value per acre.  This information is not available in each category for every county and township, but lists them when available.

I complete a survey of bare farmland sales in 14 Southwestern counties and the average sale price declined to $7,556 in 2014 from $8,466 in 2013.  This was the first average decline since 1999.

Recent reports from assessor indicate assessed values will go down in 2016.  But the assessed values and farmland sale prices are both dependent on what direction the corn and soybean prices take and if farmers are able to generate profits at the prices offered.

Friday, July 10, 2015

Repeal of Country of Origin Labeling – it’s messy

By Betty Berning, Extension Educator

In May, the World Trade Organization (WTO) found the United States’ County of Origin Labeling, or COOL, discriminated against imported animal products from Canada and Mexico. Canada and Mexico have received permission from the WTO to impose retaliatory tariffs on U.S. products. Industries impacted include meat, wine, chocolate, furniture, and jewelry, along with others. The total amount of tariffs varies, but has been estimated as high as $3.7 billion.
For those not familiar with COOL, it is a United States program that requires all fresh beef, pork, chicken, goat, and lamb to be labeled with its country of origin. It sounds simple, but it gets messy.
Processed and foodservice meat are exempt from COOL. COOL was part of the 2002 Farm Bill and modifications were made in 2008 and 2013. So, for example, if a steer was born in Mexico, finished in the U.S., and processed in the U.S., COOL requires that it is labeled as being a product of Mexico and the U.S. This is where it gets messy – extra labeling, tracking, segregation, etc.
The WTO has been hearing about COOL for several years in a back and forth matter between the United States, Canada, and Mexico. It’s been a messy journey.
Starting in 2008, Canada and Mexico filed complaints with the WTO about COOL. In 2011, a WTO panel found that this was an unfair trade practice. The U.S. appealed this decision and the practice was again found to be unfair.
Modifications to COOL were made in 2013, in the hopes of complying with the WTO’s ruling and maintaining this program. Canada and Mexico requested that a WTO panel investigate if the modifications were truly in compliance with the original ruling. In 2014, the compliance panel found that the updated COOL policy continued to create an unfair trade advantage for the United States.
The U.S. appealed this decision. The WTO issued its final ruling in May 2015 which upheld the compliance panel’s findings.
In June, the House of Representatives voted to repeal COOL. By doing so, the U.S. may avoid the $3.7 billion in retaliatory tariffs from Canada and Mexico. The Senate will vote on this next; at press time, no date was set for this vote. Many are saying COOL must be repealed because the proposed tariffs are too costly and could lead to a trade war.
The issue is messy when one examines the arguments for and against COOL. Consumer and producer groups have been COOL’s main advocates. A Consumer Reports article from June urged Congress not to repeal COOL as consumers have the right to know where their food is coming from. Farmers and ranchers have echoed these sentiments.
The logic is that clothing is labeled as “Made in China,” so why should food be different? At a time when eating locally is on-trend, it would seem as though COOL is necessary for consumers to make informed decisions. These advocates argue that consumers should be able to “buy American” if they choose.
Furthermore, due to diseases like bovine spongiform encephalopathy (BSE), proponents of COOL contend that it is a food safety measure.
On the flip-side of this, the tariffs that are being sought are huge and that is concerning to many parties. $3.7 billion is not a small number. Sources state that the tariffs could be 100 percent of a product’s value and the targeted industries will come from states whose lawmakers’ backed COOL regulations. The WTO has already agreed that Canada and Mexico may take these measures, but has not agreed to the dollar amount of these tariffs.
Critics of COOL say that the program has not had the desired impacts of food safety or consumer value. It has been a marketing measure, more than a food safety measure. For packers and processors, it’s created additional recordkeeping and labeling.
USDA estimated the costs to retailers, packers, and producers at $2.6 billion per year and added that COOL provided little measurable benefit to the consumers.
Additionally, producers in Canada and Mexico believe that fewer of their animals have been imported to the U.S. for growing and/or processing because of the increased paperwork and segregation COOL requires. Canada estimated that COOL cost its hog and beef industries $1 billion per year.
Tyson Foods has publicly shared that the program created additional costs in its supply chain due to the need to segregate meat and, as a result, it would discontinue accepting Canadian beef cattle shipped directly to its U.S. facilities. The food conglomerate also reiterated that the program had little value to its consumers.
The issue is messy with two very strong sides. Some in the middle have suggested that labeling be made optional, rather than mandatory. In this way, consumers still have the opportunity to understand the source of their food. In addition, many companies already have practices in place to support this type of labeling, so it wouldn’t require a change.
Another proposed option is modifying the current COOL policy to satisfy the WTO, Canada, and Mexico. Opponents of this are concerned that this could lead to another lengthy WTO review and during the interim the tariffs described above could be imposed.
Although there is not a clear cut answer, an answer about repealing COOL may come quickly if the Senate votes before its recess. As a beef producer, decide where you stand on the issue and understand both the costs and benefits. Be able to articulate your point by citing facts and let your representatives know your thoughts!

This article appeared in the June 24, 2015 issue of Minnesota Farm Guide.  Please reach out to Betty Berning at or 320-203-6104 for more information.

Wednesday, July 8, 2015

Challenging Times & the Need for Financial Planning

By: Pauline Van Nurden, Extension Educator

Minnesota poultry producers are currently experiencing the impacts of the most devastating outbreak of avian influenza on record. To date, millions of turkeys and chickens across the state of Minnesota have been lost to the disease. Producers are dealing with many challenges at the current time – euthanizing birds; cleaning and disinfecting their premises; and all the other physical and emotional challenges related to starting production again on their farm.

It is easy to get wrapped up in the daily management of all of these tasks. And, it is difficult to begin considering the financial planning implications of this disease on the farming operation. Yet, it is important for producers to assess their current financial position, look at scenarios for the future, and assess the best path for the future success of their operation.

Wednesday, June 24, 2015

Outlook for 2015 and Beyond

By David Bau, Extension Educator

Good early season planting enabled much of the crop to get in the ground early across Minnesota. The weather scare of a possible drought has been relieved by spring rains so at this point the yield potential is good for the 2015 crop.  Ending stocks for the 2014 crops are larger for both corn and soybeans than the previous year and the potential for these to grow at the end of 2015 is possible with the right growing conditions.

Iowa State publishes balance sheet projections for both corn and soybeans and will update these again after the June 30th crop report is released. Current projections for corn with national yield of 165 bushels would have ending carryover declining from 1,835 million bushels at end of 2014-15 crop year to 1,540 million bushels with 89.2 million acres of planted corn. This projects a $4.20 national weighted average price and $4.15 December futures price at harvest, with at 50 cents basis this would translate to $3.65 cash corn at harvest. If national yields are 159 bushels per acre, projections are for $4.85 December futures at harvest or $4.35 cash and if yields are 170 bushels, December Futures would average $3.85 or $3.35 cash. With a 165 bushel national yield ending carryover would be at 5.8 weeks compared to 7.0 weeks for 2014-15 crop year and at low of 3.8 weeks for the 2012-13 crop year.

For soybeans with an average national yield of 44 bushels per acre, on 84.6 million planted acres, the national weighted average price is projected at $8.50. With November futures at harvest of $8.50 with a local 60 cent basis this would be $7.90 cash price. With a national yield of 41 bushels per acre, November futures would be $10.70 or $10.10 cash and if yield is 46 bushels per acre November futures would be $8.25 or $7.65.  Carryover at 44 bushels is projected at 5.1 week supply, with 41 bushels 2.3 weeks and with 46 bushels 7.2 weeks.  These compare to a low of 1.4 weeks for the 2013-14 crop year.  These balance sheets can be found at: for corn and at for soybeans.

With these projected prices, it is hard for farmers to put marketing plans together at target prices that will cover their cost of production, which range between $4.50 to $5.00 for corn and $11.00 to $12.00 for soybeans.  Forward contract bids for 2015 corn and soybeans are under $3.50 and $9.00 respectively.  If prices do not improve, many farmers will experience losses in 2015. The price outlook for 2016 is not much better.  October 2015 cash prices are $3.41 for corn and $8.60 for soybeans, while October 2016 cash prices are $3.55 for corn and $8.67 for soybeans.

Lower yields might raise national prices, but will also lower the gross income per acre.  The current lower prices could create stronger demand and if the dollar weakens, this could increase export demand, the other option is a weather scare and the drought area has shrunk.  With the current outlook farmers will need to look for ways to lower their cost of production for 2016 if current prices continue.

Tuesday, June 23, 2015

Update: Frequently Asked Questions about Avian Influenza

By: Pauline Van Nurden, Extension Educator                                               Updated:  6/22/2015
Avian Influenza is affecting poultry
producers and the rural economy of Minnesota.

Highly pathogenic avian influenza (HPAI) has devastated not only the Minnesota poultry industry, but also farms throughout the Midwest and across the country. The following are current answers to frequently asked questions regarding this disease and the impacts of it. Fortunately, there have been no new infections of HPAI in Minnesota since June 5, 2015. Therefore, the information included here is an update from the original May 2015 publication.

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