Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Monday 10/29/12

Debt-Free Farmers Hit the Gas


The percentage of farmers with relatively little or no short-term debt ballooned since 2008, a study by the financial consulting firm AgriSolutions found. By the end of 2011, 40% of the grain farmers had a current ratio (current assets divided by current liabilities) of 2.0, an automatic green light for creditworthiness.


Record farm incomes since 2009 have helped four out of 10 grain farmers attain a near debt-free status on operating costs, a recent study by the financial consulting firm AgriSolutions found. But a significant percentage of growers--about one out of five--still shoulder so much short-term debt that lenders are likely to question their creditworthiness.

Lenders use the so-called current ratio to flag potential repayment problems. In agriculture, lenders prefer a ratio of current assets to current liabilities of about 1.25 to 1.65, said AgriSolutions analyst Sam Bachman. That's the measure of operating debt-- and perhaps this year's land payment--relative to current assets like cash and inventories.

Growers under 1.25 fall in the red light category. Anything over 1.65 is good and over 2 is gravy. "Since 2009, we've seen a lot more people with no current liabilities, other than a little land payment or a few bills from trade credit here and there," Bachman said. "That means they are essentially self-financing their farm operations and face minimal risks once short-term interest rates rebound from today's artificially low rates."

AgriSolutions sampled 100 grain producers from its national database to measure how growers' current ratio had improved the past four years. In 2009, when most corn growers lost money, only 27% of the farm population achieved a 2 or better average current ratio. By 2011, four out of 10 growers held at least $2 of current assets for each $1 of current liabilities, up from 27% in 2009. By 2011, another 39% fell into the acceptable range--1.25 to 2.

"What we're really seeing here is that the strong are getting stronger," Bachman said.

Still, the percentage of operators with weak debt ratios could be a concern. In 2009, 16% of all farm operations studied fell in the danger zone on their current ratios, with scores averaging below 1.25. By 2011--after the biggest surge in commodity prices in four decades--farm operations in the troubled category jumped to by another 5 percentage points.

"There are a number of factors that influence a producer's current ratio, some of which are beyond an individual's control, such as changes in the value of their grain inventory," Bachman said. But holding adequate liquid assets will protect you from future shock, he added. "We want producers to be sure they understand how their decisions can positively or negatively affect this key ratio."

Read and comment on all past DTN Ag Business Benchmarks on the Minding Ag's Business blog.

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Posted at 9:49AM CDT 10/29/12 by Marcia Zarley Taylor
Comments (3)
Marcia, I like the article and insight. It will be interesting to see how the chart changes in the next couple of years. You can bet some of the high flyers and low flyers will change. The amount of capital it takes to put a crop in has to be historical. The key for alot of these farmers is being able to put alittle $ in their pockets.
Posted by Bruce Cumberland at 7:36AM CST 11/05/12
Beware debt free farmers although many of you carry little or no debt. I'll bet you have prepaid your expenses and deferred your income to no end, and beyond. Tax avoidance being your only motive. Try estimating your deferred income tax,which is a liability. Most farmers and even bankers don't ask for, request or even acknowledge in your year end financials. Not very smart!
Posted by james earl at 8:28PM CST 01/24/13
Beware debt free farmers although many of you carry little or no debt. I'll bet you have prepaid your expenses and deferred your income to no end, and beyond. Tax avoidance being your only motive. Try estimating your deferred income tax,which is a liability. Most farmers and even bankers don't ask for, request or even acknowledge in your year end financials. Not very smart!
Posted by james earl at 8:30PM CST 01/24/13
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