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Most Crop Farms Ready for Downturn

If working capital is what farmers need to get through several unprofitable years, most conservatively managed crop farms should be in good shape.

That’s the takeaway from an analysis of Minnesota farm data offered by University of Minnesota economist Bob Craven at the National Agricultural Bankers Conference in Omaha, Nebraska, this week.

“You’ve got a group of producers out there that will be OK at $3.50/bushel (corn),” said Craven, who heads the university’s Center for Farm Financial Management.

His projection for expenses for corn and soybean production shows few opportunities to cut costs, with the projected cost of raising corn in southern Minnesota next year at $834.24 an acre, down slightly from the expected cost of $877.16 this year. Cash rent for producers in the FINBIN database rose from $250 an acre in 2013 to almost $258 this year, with next year’s projected rent at nearly $245. Those farmers are likely to spend a lot less on fertilizer, $155 an acre vs. $191 in 2013.

Yet, going into 2013, all Minnesota crop farms in the database had working capital averaging more than 50% of gross farm income, well above the 33% rule of thumb considered necessary to weather several tough years.

Craven showed that even low-income crop farms in Minnesota and the nearby states in the database will be able to survive $3.75 corn and $9.50 soybeans by drawing on working capital.

Those farms with more than $500,000 in annual sales but in the bottom 40% of net income still have an average of $320,000 in beginning working capital. At those prices, Craven expects an average net loss of $133,500 on corn and $42,750 on soybeans. After taking out more than $100,000 for taxes and family living expenses, the farm would end up with $46,250 in working capital.

Yet, if the farm enrolls in the farm bill’s new Agricultural Risk Coverage program, it likely would receive an ARC payment next fall of about $85,000 that could be added back into working capital.

Very large farms that expanded quickly that have less working capital could lose much of their net worth in 2015, however, as Craven showed with one example of a 12,000-acre farm that could have losses of more than $3 million next year.

“These guys are subject to a lot of risk, and it can go fast,” he said. 

At the end of his talk to members of the American Bankers Association’s ag lending group, Craven added that he’s not endorsing ARC over the other farm program available to growers, the Price Loss Coverage program. PLC offers better protection against even lower, catastrophic levels of prices. ARC payments, which could be bigger in 2015 (for the 2014 crop), will vary by county because they’re tied to a county’s yields as well as the national average prices for crops.

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