Working Capital: The Original Risk Management Tool

Frontier Farm Credit and Farm Credit Services of America are co-sponsoring a five-part webinar series, Two Economists and a Lender. The fourth webinar, featuring Agriculture Economic Insights (AEI) co-founders David Widmar and Brent Gloy and Chris Williams, a financial officer in our Manhattan, Kansas office, focused on working capital. Register for our next free webinar, Machinery Investment, on Thursday, October 24 at 12:30 p.m. CDT.

Below are highlights from their discussion, as well as the full webinar.


Working capital is one of the most talked-about indicators of financial well-being in today’s agricultural industry – and for good reason. Working capital is a producer’s first line of defense in challenging times. On the flip side, it is critical to capitalizing on opportunity.

The definition of working capital is current assets minus current liabilities. Current assets are those that are expected to be converted to cash within a year: cash/savings, grain or livestock inventories, and input inventory. Current liabilities are those due within the next year: bills to be paid and this year’s portion of long-term debt payments.

Which measure?

Brent Gloy and David Widmar shared several ways to look at working capital. The measures included:

  • Total dollars
  • Dollars per acre or per head
  • Current ratio: current assets/current liabilities
  • As a share of gross revenue

“Benchmarking against ratios can help you get a feel for where you are,” Widmar said. But “don’t get hung up on the nuances; just choose one that works for you to track.”

Widmar also advised producers to be mindful of the risk associated with asset valuation.

“A dollar in your bank account is not the same as a bushel of grain in a bin,” he said. “It’s really important to be aware of price changes that can significantly affect your cash on hand.”

By using the same measurement/s to track working capital, producers can identify trends and take corrective measures if needed, the economists said.

Set a goal and chart your course

As a general rule, Frontier Farm Credit advises producers to aim for $200 per acre in working capital. But many factors can influence available working capital, including:

  • Owned vs. rented farmland
  • Enterprises
  • Outlook for the next year
  • Personal preferences and plans (i.e. an operator’s risk tolerance, pace of growth . . .)
  • A lender’s expectations.

If an operation needs to improve working capital, producers have options, said Chris Williams, who works with borrowers out of our Manhattan, Kan. office.

“Maybe there are some underutilized assets that can be sold. Or maybe there are ways of restructuring assets to free up cash,” he said. “However, those are short term. Ultimately, operational changes and profits from the business are the long-term answer.”

 

corn stalks

2019 Decision Time: ARC vs PLC

Frontier Farm Credit and Farm Credit Services of America (FCSAmerica) are co-sponsoring a five-part webinar series, Two Economists and a Lender. The third webinar, featuring Agriculture Economic Insights (AEI) co-founders David Widmar and Brent Gloy and Melissa Elstermeier, a financial officer with FCSAmerica, focused on ARC vs. PLC ahead of Farm Program signup. Register for our next free webinar, Working Capital, on September 26 at 12:30 p.m. CDT.

Below are highlights from their discussion, as well as a link to the full webinar.


Farm Program signup for the 2019 and 2020 crop years begins September 3. But producers have until March 15, 2020, to choose between ARC (revenue coverage) and PLC (price coverage). The experts advised taking time to fully understand how each impacts your operation before making a final decision.

“There is no rush,” David Widmar said. “By the time we get into 2020, you will know a lot more about your 2019 yields and price prospects.”

Current economic conditions are important to understanding how the features of ARC and PLC will impact your operation. The economists shared a map of counties where ARC payments over the life of the 2014 farm bill were higher or lower than PLC payments. In most of Nebraska, corn ARC performed better than PLC by more than $50 to $100 an acre, Widmar pointed out. “In southern Iowa, however, it performed about $50/acre worse than PLC.” In general, PLC worked better for wheat, he added.

arc-co payments less estimated plc payments

Based on several factors, including tweaks in the 2018 farm bill and several years of poor returns, the Congressional Budget Office believes the pendulum generally has swung from favoring ARC to favoring PLC. USDA’s August projection that 2019 corn will average $3.60 implies a PLC payment of 10 cents per bushel.

However, Widmar cautioned, two bad strategies are repeating your 2014 decision and automatically picking PLC. One reason for this: The change in ARC benchmark yields. Many counties saw corn yields improve by 21 to 40 bu./acre and a substantial number saw their averages rise by more than 40 bu./acre under the current Farm Program.

“That will be a big benefit for some counties that had outstanding yields the past few years,” Brent Gloy said. (See map.) The same is true for soybeans.

“So, particularly if your yield in 2019 is really bad, ARC may be a better choice because of its higher yield guarantee,“ Gloy said.

estimated change in corn arc-co benchmark yields

“Given tight margins, it’s critical we all make good decisions and not leave dollars on the table,” Gloy said. “Use all the risk management options you have and view these government programs as a supplement.”

Watch the full half-hour webinar below.

farmland

Farmland Values Relatively Stable, Despite Downward Pressure

Farmland values slipped some in the first half of 2019. But on the whole, the real estate market for cropland in eastern Kansas and the grain states of Iowa, Nebraska and South Dakota remained stable as values continue to slowly adjust to the current margin environment

The value of 71 benchmark farms tracked by Frontier Farm Credit and Farm Credit Services of America (FCSAmerica) declined an average of 0.83% in the first six months of 2019.

“Despite continued tight commodity price margins in 2018, real estate values remained stable and were supported by a favorable interest rate environment, market facilitation payments and equilibrium in the supply and demand levels for real estate,” said Tim Koch, chief credit officer for the alliance of Frontier Farm Credit and FCSAmerica.

Farmland values in eastern Kansas declined 3%, as a whole, in the first six months of 2019, the largest decline in Frontier Farm Credit’s and FCSAmerica’s latest benchmark farmland study. Compared to a year ago, cropland values are down 1.8% and pasture land is down 3.1%.

While Iowa farmland experienced a decline in 2019, values still are up 2.7% compared to a year ago. Modest declines in Nebraska and South Dakota in the later half 2018 extended into 2019 for a drop of 1.4% and 1.3% since last July.

State (No. of benchmark farms) Six Month One Year Five Year Ten Year
Kansas (7) -3.0% -2.4% Not available Not available
Iowa (21) -1.3% 2.7% -15.3% 71.3%
Nebraska (18) -0.4% -1.4% -15.7% 103.1%
South Dakota (23) -0.7% -1.3% -8.9% 91%
Wyoming (2) 6.5% 9.8% 35.9% 45.9%

 

Three of the seven benchmark farms in eastern Kansas lost some value in the first half of 2019, two increased and two showed no change.

Of Iowa’s 21 benchmark farms, 10 decreased in value, three increased and eight saw no change. Ten benchmark farms in Nebraska lost value, five increased and three were unchanged. In South Dakota, values dropped on five farms. The remaining 18 farms held even. Wyoming continues to see values for cropland and pastureland increase. However, the limited number of farmland sales in the state makes it difficult to accurately track trends.

Farmland sales across the Associations’ territory were down in the first two quarters of 2019 compared to the same period in 2018. Sales in eastern Kansas fell by more than 52%, although public auctions were up 6% compared to the first two quarters of 2018.

South Dakota saw 26.7% fewer sales. In Iowa, sales were down 11%, while Nebraska’s combined sales for irrigated and dry cropland dropped 18.4%.

The average quality of land has not changed in the past year, and buyer demand for high quality ground remains strong.

MFP Payments Will Bolster Income in a Challenging Year

We recently sponsored a webinar, “MFP 2019: From D.C. Policy to Farm Budgets,” featuring Agriculture Economic Insights co-founders Brent Gloy and David Widmar. Register for our next free webinar, ARC/PLC Selection, on August 22 at 12:30 p.m. CST. Highlights from MFP webinar are below or watch the full webinar.


How should you view your MFP payments?

Direct farm payments in 2019 could constitute one-fourth of net farm income, the highest proportion in a dozen years. The Market Facilitation Program (MFP) implemented to offset the impact of trade disputes to U.S. agriculture will provide more than $50 per acre in income to producers in parts of our territory (see map). Click to view Kansas county payment rates on agmanager.info.

A webinar hosted by Farm Credit Services of America and Frontier Farm Credit helps producers better understand the impact of this year’s direct payments – for both their operations and the industry as a whole. Presenters David Widmar and Brent Gloy, co-founders of Agricultural Economic Insights (aei), as well as Derek Mohr, a financial officer based in Perry, Iowa, spoke just hours after USDA announced details about the issuance of MFP payments.

The first payment, expected this summer, will be up to half the announced rate for a producer’s county. Payments can range from $15/acre to $150/acre. There is no guarantee rounds two and three will occur.

MFP payments 2019 - five states
The $14.5 billion earmarked for MFP payments is big, but no record. Direct payments were higher in inflation-adjusted dollars in each of several years between 1985 and 2005, the economists noted.

Real Direct US Farm Payments
Government payments issued in 2018 proved significant for grain-producing states. Overall net farm income for members of the Kansas Farm Management Association increased from 2017 to 2018, with 80 percent of the increase attributed to direct government payments (including MFP, ARC/PLC, disaster payments and conservation payments).

net farm income and govt payments 2014-2018
Gloy and Mohr advised producers to be strategic about how 2019 government payments fit into their financial planning.

“When MFP payments were announced last year, we counseled our customers to retain as much as they are able and use the money to replenish working capital. Liquidity is essential in this ag environment. We are recommending the same this year, especially for those who end up having a good year.”
– Derek Mohr, financial officer based in Perry, Iowa

He noted that crops in his area are looking good – and market volatility offered better-than-expected prices for corn and soybean.

“It is risky to make any plans based on government programs,” Gloy said. “I would not make tax or purchasing decisions driven by this income, for instance,” he said.

Watch the full half-hour webinar below.

MFP Payments Will Help This Year

USDA has announced new details about its $14.5 billion Market Facilitation Program (MFP). One of the most important details for grain producers – payments will be based on your county crop history, not on the crop you grow.

In parts of our eastern Kansas, growers will receive more than $50 an acre in MFP payments. The map below, developed by the consulting company Agricultural Economic Insights (aei), shows MFP payments will range from $15/ to $150/acre, with the highest payments expected in the Delta and cotton areas of other states.

MFP payments 2019

Signup for 2019 MFP payments begins July 29 and runs through December 6. Producers are expected to receive a payment this summer. Experts say there could be three installments of 2019 MFP payments, with the first being the largest – but they also caution that the number of payments and their scheduling remains unknown.

Payment caps will apply. For example, in neighboring Iowa’s Boone and Dallas counties, where the county payment rate is $65/acre, farmers top out at 3,850 acres of nonspecialty crops.

MFP payments for livestock include milk, 20¢/cwt., and hogs, $11/head based on inventory. The payment calculation period for livestock has not been announced. Visit Farmers.gov for full details about MFP.

Frontier Farm Credit and Farm Credit Services of America hosted a live webinar on July 25 featuring aei economists Brent Gloy and David Widmar discussing MFP payments and their impact on farm budgets. Watch frontierfarmcredit.com for a recording of the webinar.