Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Tuesday 11/06/12

Do Lenders Own Your Farm?

Fewer grain farms are likely to be held hostage by their debt loads should today's Golden Era end abruptly. Unlike the 1980s, America's grain producers have bolstered an important equity ratio since 2007 that will help them withstand a return to thinner profits or higher interest rates, a recent study by AgriSolutions found.

AgriSolutions divided 100 farm operators into four groups (quartiles -- three of which are shown on this chart), ranked by highest to lowest equity. It found growers have made great strides building their ownership stakes since 2007. In this study, the mid-quartile (50% quartile) of grain producers had an asset/debt ratio of 0.72 in 2011, up from 0.62 four years earlier. (Chart courtesy of AgriSolutions)

After the 1980s debt crisis, financial advisers encouraged farm operators to keep their equity-to-asset ratio above 0.5 at a minimum, AgriSolutions consultant Sam Bachman says, with 0.66 the recommended level.

Bachman divided 100 grain farms in the AgriSolutions database into four quartiles, ranked by their asset/debt ratio. The lowest quartile grew its score from 0.45 to 0.52, so they still have room for improvement, Bachman says. The Brighton, Ill., firm's customer base spans 13 states and represents all size farms, from part-timers to 10,000-acre operations.

"The equity-to-asset ratio is a measure of who really owns the farm, the bank or the farmer," Bachman says. "So at 0.66, you own two thirds of your operation and the bank owns a third. It's one benchmark you should watch over time to make sure you're making progress in your operation."

Between 2007 and 2011, the bottom quartile of grain farms sampled from the AgriSolutions database boosted its median equity-to-asset ratio from 0.45 to 0.52, so those farms still have room for improvement, Bachman says. The Brighton, Ill., firm's customer base spans 13 states and represents all size farms, from part-timers to 10,000-acre operations.

"Commodity prices have been shaken up so much since 2006 that farmers are making real money, not just eking out a living," Bachman said. "You can't fix a low equity position overnight, but this shows you can work on it over a lifetime."

All quartiles in this sample registered steady progress since 2007. The median group grew their equity from 0.62 to 0.72 during this same period, adding about $250,000 added to their net worths, Bachman said.

Growers in the top quartile have amassed a war chest of assets, owning about 0.89 of their operations in 2011, up from 0.83 in 2007.

While some operators aspire to retire their mortgages, the debt-averse may be growing slower than their peers because they aren't leveraging assets, Bachman noted. With 20-year farm mortgage rates hovering near 4.5% -- down from 8.55% as recently as 2008 -- it may not make sense to be totally debt free.

Ultra-conservative operators may be missing a rare opportunity to grow their businesses with borrowed capital, he added. They have the most capacity to take on new rental ground or invest in items such as irrigation or drainage that will increase their overall profitability without endangering their credit worthiness.

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

Follow Marcia Taylor on Twitter@MarciaZTaylor

 

Posted at 6:47AM CST 11/06/12 by Marcia Zarley Taylor
Comments (2)
How much of this was actual earned equity and not "paper" equity? Can you find out?
Posted by Matthew Schreurs at 9:29AM CST 11/06/12
Matthew, good question. It turns our farmers are earning wealth the old fashioned way--more through real profits than through inflating assets like land and equipment. AgriSolutions studied these 100 operators to analyze earned net worth since 2007. In 2011 alone, the farms generated $19.8 million in asset appreciation (paper profit) and $33.2 million in real earnings. We covered this in more detail in a blog "Are You Better Off Than Four Years Ago" if you want to scroll back to recent blog posts.
Posted by Marcia Taylor at 6:11PM CST 11/07/12
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