Minding Ag's Business

Stacie Koger's family farm has already accrued a state corn yield title and has been in the running for others. But unlike yield contests, most farmers outside the Corn Belt lack standard benchmarks to measure whether they're profit champs or just contenders. So five years ago when the certified public accountant came home to her family's Mississippi Delta crop farm to handle finances, she instituted her own yardstick. Koger converted all the farm books to accrual and began charting key expenses and financial ratios for the past five years, hoping to spot critical trends and to stay proactive.

"When you're growing as fast as we are, it's hard to get a picture of how you're doing," said Koger, a partner in Silent Shade Plantation with her brother, Jeremy, and their parents, Willard and Lauralee Jack. (Koger's husband is a PhD weed scientist and former Mississippi soybean specialist who consults for the farm part time; her sister-in-law offers expertise gathered from her job in human resources). The operation has leapfrogged from about 3,000 acres to 8,000 irrigated acres in the last five years, with more expansion in the works and about a dozen seasonal and full-time employees. Koger's parents also own and operate a trucking business that works in collaboration with the farm.

One ratio that plagues high-growth farms is a shortage of working capital -- the liquid assets like grain inventories or savings that could be easily converted to cash in the event of emergency, Koger's analysis found. In agriculture, lenders like to see $2 in cash-like assets for every $1 of short-term debt and consider $1.10 to $1 minimal. Those who cash rent most of their land like the Jacks need even higher reserves.

By one measure, studies by Freddie Barnard, a professor of agricultural economics at Purdue University, found the "median" commercial farm carried about 59 cents of working capital for each $1 of gross farm revenue in 2010, a guideline some lenders follow. Operators under age 30 or those who rent more than 90% of their land fell below that median.

More conservative farm lenders recommend that those with big cash rent obligations -- say who rent more than 40% of their land base -- set aside $300 per acre in working capital just in case grain prices collapse and cash rents take time to adjust. Those who own most of their land base need only set aside $200 per acre.

"One big concern with landlords is how many years we have on a lease, especially if we've purchased equipment to take on that farm or installed irrigation," she notes. Most leases at Silent Shade run five years to absorb some of that risk.

Dick Wittman, a farm financial consultant and Idaho farmer, sees working capital as a type of war chest. It can include anything from a line of credit that's ready and waiting to be used, or cash value in life insurance. "We've tapped that many times as a down payment on land, although we always plan to pay it back quickly," he tells the classes he instructs on farm financial management.

As a former small business auditor, Koger knows it's important to have a backup plan and plenty of cash in reserve. Her hometown Belzoni still relishes its title as the world's catfish capital, but USDA estimates the industry is 40% smaller just since 2002 and many local farm ponds have been converted back to crops. Koger noticed it was the low-cost operators and those with deep pockets who survived the crash.

"The catfish industry enjoyed some good times until feed costs soared and a flood of Asian imports hit the U.S. market," she says. "The industry just wasn't prepared for that kind of change. Those with lavish lifestyles and BMWs didn't survive. What it taught me -- I didn't want to live so large we hurt the business." Fortunately, record yields and prices in 2012 are helping Koger's Silent Shade Plantation store away more working capital this season, just in case crop farming someday hits its own rough patch.

Editor's Note: Koger is a 2012 DTN scholarship winner at TEPAP, The Executive Program for Agricultural Producers, an elite Texas A&M management course for mid-career farm and ranch operators, which includes courses on finance.For information on DTN's scholarship for the January 2014 course, go to http://tepap.tamu.edu/…

For information on farm financial standards go to www.ffsc.org

or University of Illinois's site at www.farmdoc.illinois.edu/finance/benchmarks.asp

Source: University of Minnesota, 2005-2009 based on state farm business farm management association data

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