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Extension > Agricultural Business Management News > June 2014

Tuesday, June 10, 2014

FINBIN Database Useful Tool

By David Bau, Extension Educator

Farm production records for 2013 have been added to FINBIN website. Farmers who participate in Adult Farm Management programs across Minnesota production records are combined online at the FINBIN website. The FINBIN website found at: is full of great reference information going back to 1993. At the FINBIN website, producers can examine what has been taking place with their peers or examine costs for different crops.

At the FINBIN website you are able to generate summary reports, benchmark reports and compare your farm financial results to peer group farms. Under the summary section you are able to generate reports summarizing whole farm results for financial standards, income statements, profitability measures, liquidity measures, balance sheets, statement of cash flow, crop production and marketing summary, household and personal expenses operator and labor information, nonfarm summary and detailed income statement. There are also statewide reports on several different crops and livestock enterprises. You can also generate any of these reports by county or regions if there are enough farmers to produce report where the individual farmer's data can remain anonymous. You can examine the data even further selecting tillage systems, irrigated land and organic production, sometimes on a larger region or for whole state to generate a report.

There is significant information for farmers and landlords to examine at this website. You can examine farmland rental rates by county and looking at fourteen counties in SW Minnesota there was a 10.9 percent increase from 2012 to 2013 from an average rent of $209 in 2012 to an average rent of $232 per acre. The FINBIN data allows the public to examine the various inputs costs like seed, fertilizer, chemical, etc. for various crops including corn, soybeans, hay, wheat, oats, sweet corn, peas, sunflowers, sugar beets and many more. You can also examine cost of production for many livestock operations.

Benchmark reports are the next section on FINBIN website. You can look at whole farm, crop or livestock enterprise by whole state, region or county. You can select a crop and region and generate a report listing the expenses for 2013 or prior years. If you select corn for all of Minnesota, you will see a benchmark report that lists all expenses and incomes for corn on cash rented land across the state broken down into every 10 percent groups. The benchmark report allows farmers to examine individual input cost like fertilizer and list all the costs for 2239 farms across Minnesota from the highest to lowest for expense or lowest to highest for income items.

For fertilizer the median cost is $176.08 per acre for all Minnesota corn farms on cash rented land. The report then groups all the fertilizer cost per acre listing the average for the highest 10% of the fertilizer costs per acre of $276.00 and then the next 10% in the 20% column at $235.86 all the way up to the lowest fertilizer cost of $67.18 per acre in the 100% column. These farms are all across the state and the fertilizer recommendations would vary by expected yield per acre, but this line indicates a wide range in costs from the most expensive at $276 to the lowest at $67.18. Farmers can benchmark their own fertilizer costs per acre to see how they compare. They can choose a county and closer region to see how their input costs compare to other farmers in the local area.

The third section allows for farmers to enter their own financial standard ratios and once again compare their figures to farmers across Minnesota or select a smaller closer region or county. Once again a farmer would be able to determine their own farm's financial health compared to peers.

The FINBIN website is a great resource where farmers and landlords can look at production cost for previous years and compare how their own operation compare to county, regional and statewide data.

Retirement Issues for Farmers

By David Bau, Extension Educator

The average farmer's age continues to increase and many farmers continue to farm well into their retirement years, others semi-retire and others fully retire. How does a farmer reaching retirement age know if they are ready for retirement?

When a farmer is thinking about retiring they should focus on what their goals are. Do they want to stay involved in farming operation, turn over control to next generation or become a landlord? They should also consider what lifestyle they and their spouse want to live in retirement? Do they want to be snowbirds and escape Minnesota winters, or do they want to stay close to farm and family to watch and participate in family activities.

Some basic retirement questions are:

Are you financially ready? Financial planners say you should have at least 8 times your pre-retirement income saved to help increase the odds that you won't outlive your savings during 25 years in retirement. For example, by age 35, it is suggested that you should have saved 1X your current salary, then 3X by 45, and 5X by 55. Your years in retirement and your withdrawal rate have a big impact on this factor. Some plan on living to 100 or 35 years in retirement. No more than 4% asset withdrawal rate is recommended so you do not outlive your retirement assets. But if you are a farmer with a next generation farming, you have to think on an income perspective and not asset liquidation.

What are my sources of retirement income going to be? Social Security and land rent will be a major source of your retirement income. Are you going to continue to take a withdrawal from the farm account each year? Are you going to have assets outside the farming operation to depend on or is the rental income going to be your main source of retirement income?

What are my retirement expenses going to be? Generally your income needs go down in retirement until you enter a nursing home. A general rule of thumb is 80 percent of your preretirement income will be able to maintain your lifestyle in retirement.

How is my health and do I have an affordable health care coverage available? If you semi-retire before reaching full retirement age, you will have to fund your own healthcare until Medicare kicks in and it can be very expensive. With people living longer, health-related problems can increase as you grow older.

Is my retirement lifestyle dependent on the farm income? Is your retirement income dependent on a farm draw and what is the backup plan in case of a bad year or two in farming? It might be wise to have other funds and investments to survive a couple tough years of farming.

What are you going to do with your free time? It may sound simple, but many who retire may get bored without work. Many farmers if working with extended family, can continue to maintain their working lifestyle and maybe just cut back on hours, but if you are quitting farming altogether what will you do with your new found free time?

Examine Long Term Care Options. The odds that you will spend some time in a nursing home are 50% which mean one out of two of us will spend time in a nursing home. Some will self-pay, but many will purchase long term care insurance to help offset the nursing home costs.

Do some planning before retiring to see if you have sufficient assets and income to maintain your quality of life you want in your retirement years.

Friday, June 6, 2014

Look Past Averages When Making Farm Financial Comparisons

By Don Nitchie, U of M Extension Educator, Agricultural Business Management

Most recommended farm financial benchmarks measure financial or profitability relationships. Income as it relates to expenses for instance or assets as related to liabilities. The average of a group of farms is very good at showing a trend of that group of farms in general over time. However, comparing your benchmarks relative to other producers at your stage of career and size or type of operation, maybe even more important. Although financial standards might indicate that a certain benchmark should ideally be a certain number, you may need to stretch the acceptable range for that benchmark depending on if you are earlier in your farming career or later, or possibly by the type of your operation. Below, we look at the Current Ratio measuring Liquidity from the Balance Sheet and the Net Farm Income Ratio measuring Financial Efficiency-as two examples.

Liquidity as measured by your Current Ratio. Liquidity is the ability of your farm business to meet financial obligations as they come due over the current year. The Current Ratio is the ratio of your current farm assets/current farm liabilities. Farm Financial standards suggest this number should not be below 1.1 and anything above 1.7 is a strong position.

In the Southwest Minnesota Farm Business Management Association (SWMFBMA), as an example, the average current ratio has been trending higher until 2012, reaching a high of about 3.25 in 2011. While the average remains at an extremely strong 2.7 at the end of 2013, the trend may have reversed.

SWMFBMA Current Ratio by Size; Gross Farm Income


The table above shows the Liquidity on average of all SWMFBMA farms was strong in 2003 and was even more so in 2013. It should be noted that larger farms, (over $1 million gross income), had a lower ratio in 2003 of 1.63. In the larger group in 2013, there were 8 farms with gross incomes over $2 million who had an average current ratio of 1.95. While still very strong this was substantially less than the association average of 2.72. The category of $250,000 or less includes part-time and beginning farmers who often have off-farm income and in some cases are trading labor for machinery use or are sharing machinery. Some financial experts do advise, that over the long term, you can have excess working capital and liquidity. Keeping your capital working for you and earning profits from business operations, if production returns are good, maybe the best use of that capital. While maintaining a strong current ratio does provide a safety net for income shocks or reserves for productive asset purchases or expansion. Monitoring ratio benchmarks is all about measuring and managing a balance over time by using them to set goals and adjust.

SWMFBMA Current Ratio by Age of Operator


The above table demonstrates what is commonly true when looking at current ratios by the age of operator. When you are early in your career and trying to become established, maybe expanding your business and maybe growing a family, you may need to run a current ratio somewhat "leaner" and keep cash working as much as possible. This leaves less room for a financial or market price shock but, if some conservative inventory valuations are used on current assets, improved selling prices and sound margin management can compensate to a point. Early in a career there are many future years yet to produce and improve or correct.

Financial Efficiency as measured by your Net Farm Income Ratio. This group of benchmarks shows how effectively your business uses assets to generate income. They show what the total effects of your production, purchasing, pricing, financing and marketing decisions are on whole farm profitability. One of these, the Net Farm Income ratio, equals Net Farm Income (profit)/Gross Farm income. It shows how much is left after all farm expenses, except unpaid labor and management, are paid. Farm financial standards suggest if only 10% or less of your Gross Income ends up as Net Farm income, you may be vulnerable. If 20% or more of your Gross income remains as Net Farm income you are financially very strong and profitable. Except for 2009, most SWMFBMA farms, in recent years, have been at or above 20% until 2013. Both selling prices and costs impact this measure as it measures whole farm profitability.

SWMFBMA Net Farm Income Ratio by Size; Gross Farm Income


In the above table showing the net Farm Income ratio by select Gross Income categories, one can make a couple of observations. It does appear at the smaller Gross Income levels, where there are more part-time and beginning farmers; they are able to produce substantial Net Farm Income from a given amount of Gross. They may accomplish this by trading some labor for machine or other asset use, sharing machinery with others and possibly utilizing share-rent options. At the average and larger farm sizes margin management year over year probably becomes more important as significant investments are at risk. This also reduces some opportunities for windfall profits.

SWMFBMA Net Farm Income Ratio by Age of Operator


In the above table of Net Farm Income Ratio by age of Operator, it is not so clear that there is any identifiable trend other than it was lower in 2013 for everyone. It is encouraging that in the two years selected it is fairly consistent across ages/experience of operators. Hopefully, if true across more years, there seems to be an opportunities to be profitable at all levels.

Sources; SWMFBMA 2003 and 2013 Annual Reports. Farm Financial Scorecard, 2009, University of Vermont Extension & Center for Farm Financial Management @ University of Minnesota.

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