Commodity price slump is stressing Iowa farmers’ finances
Persistently low commodity prices during the past four years are causing deteriorations in the liquidly and solvency of Iowa farms, according to a new study by Iowa State University (ISU) Extension and Outreach.
However, the financial stress varies widely from farm to farm depending on the operation’s debt, its cost structure and other factors, according to Alejandro Plastina, an ISU Extension economist who authored the study based on data supplied by the Iowa Farm Business Association.
“There is more financial stress generally, but some farms have the equity and balance sheets to handle it much better than others,” Plastina said. He estimated that at the end of 2016 some 20 percent of Iowa farmers have both vulnerable liquidity (current assets divided by current liabilities) and solvency (total liabilities divided by total assets) ratings.
Dave Miller, Iowa Farm Bureau Federation director of research and commodity services, agrees that the low commodity prices have affected Iowa farms very differently. The downturn, he said, is really hitting farmers who are leveraged or whose primary assets are in equipment instead of land.
“The reductions are most pronounced in loss of working capital that has been exacerbated by continued negative cash flows,” Miller said.
“While the average farm in Iowa has accumulated a net loss of $180 per acre in working capital between December 2014 and December 2016, those in the most vulnerable liquidity situations have accumulated an average loss of $347 per acre during that same time period,” Plastina added.
Tougher in 2017
Very strong yields in some parts of the state in 2016 helped to offset the liquidity issues for some farmers. But, Miller said, 2017 is likely to add additional stress on balance sheets for many Iowa farms.
“Some producers are experiencing greatly reduced crop yields this year due to drought and other weather stresses. But with national yields near trendline and the lack of a market rally, these producers are seeing sharply reduced gross revenues this year,” Miller said.
In addition, declining or non-existent government payments through the Agricultural Risk Coverage (ARC) or Price Loss Coverage (PLC) programs aren’t providing much of a safety net, he said.
The continued stress, Plastina said, means that many farmers will likely need to take steps to reduce near-term costs, if they haven’t done that already. In many cases, that has meant working with lenders to refinance short-term debt using land or other assets as collateral, the ISU economist said.
The refinancing option is open to farmers with adequate debt-to-asset ratios because of the relatively low long-term interest rates, Plastina said. That, in a sense, is borrowing some of a farm’s long-term solvency to address near-term liquidity problems, he said.
“However, that’s a one-time tactic for most farms,” Plastina said. “I doubt that a lot of lenders would be willing to refinance again and again.”
Miller said most farmers are looking at many different ways to reduce cash outlays, particularly for their largest expense, which is cash rents. “That’s something that will need to happen in the coming years as farmers look to stem the cash drain from low commodity prices,” he said.
In addition, Plastina said, some farmers may have to look for alternative sources of revenue to supplement farm revenue to improve their liquidity position.
You can find the entire ISU Extension article about the financial condition of Iowa farms at http://batyl/2yhwldT.
Want more news on this topic? Farm Bureau members may subscribe for a free email news service, featuring the farm and rural topics that interest them most!