Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Tuesday 10/16/12

Farmers Cool Their Credit Spree

Farmland, farm equipment and grain bins are often perceived as must-have items when farmers hit a profit streak. But after celebrating one year of excess spending in 2008, growers adopted more conservative buying habits, a new study by the financial consulting firm AgriSolutions found.

In 2008, AgriSolutions clients spent more than 90% of their profits on farmland, almost 70% on equipment and 40% on buildings and improvements--for a total of more than 200%. That spree required debt financing, but growers have shown more restraint since by paying for big ticket items with profits.

Starting in the 2008 crop year, 100 growers randomly selected from the AgriSolutions database spent $24 million on three types of capital improvements--land, machinery and buildings/improvements like bins and drainage tile. By the 2011 crop, this annual investment budget had grown to $34 million but was much less reliant on credit.

What's key is that growers' ability to pay with cash profits grew even faster than their outlays, thanks to record commodity prices and profit margins, says AgriSolutions financial consultant Sam Bachman. His conclusion: Growers have actually been better at living within their means.

Farm profits ballooned nearly four-fold between the 2008-crop and 2011-crop for this subset of producers, with the group earning nearly $50 million in net profits last year. Meanwhile, expenditures for capital investments like farmland, facilities and equipment grew at a much more moderate pace, only 1.42 times what the growers spent in 2008.

Binge buying characterized that year. AgriSolutions clients spent more than 90% of their profits on land purchases in 2008, another 70% on machinery and another 40% on buildings and other improvements--for a total of more than 200% of earnings on just three categories. That 2008 spree required debt financing to cover capital purchases, but growers have shown more restraint since by paying more of those costs out of profits, Bachman said. In 2010, growers spent 85% of their profits on capital purchases and reduced outlays to only 73% of profits in 2011.

The data supports the notion that growers are buying farmland and other big-ticket items with cash rather than borrowing.

"Clearly some producers have backed off the reinvestment euphoria of a few years ago," Bachman said.

"What's encouraging is the apparent self restraint that the 'average' producer is able to exercise even though 2010 and 2011 were highly profitable for the majority of operations," he added."Some operators continue to grow aggressively but it's not leverage, leverage, leverage for all of them."

Larger producers typically have multiple entities for operating and investment purposes. This study merged results from all those units to give a true picture of each farm's profitability.

Editor's Note: AgriSolutions Sam Bachman will host a breakout session on the benefits of benchmarking your financial performance at the DTN-Progressive Farmer Ag Summit in Chicago Dec. 10-12. For details go to www.dtnagsummit.com

Follow me on Twitter@MarciaZTaylor

Posted at 3:17PM CDT 10/16/12 by Marcia Zarley Taylor
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