Working capital on leave

Agriculture is a great way to make a life, but can be a tough way to make a living.

Commodity prices, weather and trade bombshells this year have left producers – and economists, taking a harder look at a 5-year trend showing a steady erosion to the balance sheets of ag operations nationwide. A recent report from the Agricultural Economics Insights group, which provides weekly analysis on key trends, states working capital in the U.S. ag sector is now at critically low levels.

Working capital, defined, is a measure of the liquidity of an operation – calculated by subtracting current liabilities from current assets. It is a good indicator of the amount of cash farmers and ranchers have available to make purchases and repay their short-term debt obligations. The easiest way for ag producers to generate working capital is to earn profits, thus working capital has continued to decline as profitability has eroded in recent years.

In a paper written by Brent Gloy of Agricultural Economics Insights, Gloy says working capital available in the farm sector is at $38 billion, the lowest ever since the Economic Research Service started publishing that number in 2009. He notes the declines are stark and projected to fall another 25 percent from 2018 to 2019, following a 30 percent decline from 2017 to 2018. “Compared to 2014, the current level of working capital is just 31 percent of the value achieved in 2014 and only 23 percent of the high achieved in 2012,” Gloy writes.

Dr. Jim Minert, professor and Extension economist at Purdue University, says the challenge in the ag industry over the recent half decade is that decreased commodity prices have not been met with a drop in key input prices, especially cash lease and purchase price of land. Farmers have had to dip into cash supplies to sustain living operations. “From a long run perspective, this isn’t sustainable – you can’t keep pulling working capital down.”

Minert studies the ag sector through the lens of the Ag Economy Barometer, a collaboration between Purdue and the CME Group, which surveys 400 ag producers across the nation every month. One of the questions in the monthly survey asks: Is now a good time or a bad time to make large investments in your farming operation?

“Since May that index was as low as it has ever been,” says Minert, “In June it recovered, but only moderately. Farmers are telling us they have to be careful of making investments.”

Dr. Sam Funk is director of agriculture analytics and research for the Iowa Farm Bureau Federation. He says agriculture has always been cyclical in nature, but these times have been very challenging. “We see a lot of producers drawing from long term equity, utilizing expenses that are long term in nature,” Funk says. “We’re trying to pay last year’s debts by selling assets or borrowing against them.”

Funk says like any time in the industry, it’s important for operators to know their bottom line, what they need to sell at to be profitable, and manage their farm like a business. “There was a time when you only had to be a great farmer to make a living farming, then you had to be a great marketer, and now you have to be a great businessperson too,” he says. “Those who are going to make it are those who take advantage of market conditions or opportunity or have sharpened their management and are making it work.”

Although the ag temperature in the Midwest is influenced most heavily by corn and soybeans, the pressure is just as heavy in the ranching sector.

Ty Wells is president of Montana Livestock Ag Credit, Inc. in Helena, Mont. He says the squeeze is definitely being felt by their customers. “We can definitely account it to lower commodity prices and higher input costs, but a really tough third factor among our ranchers has been a calf crop percentage loss due to weather.”

Wells says his team does a tally at branding time with their customers, and they’re routinely seeing 10 percent to 20 percent losses across the state, in some areas significantly higher.

“The bottom line is it is going to be dang tough for a while; people are going to have to lean on their equity to get them through this,” Wells says. “They’re going to have to conduct enterprise analysis and figure out where they can bring costs back in line.”

Tough current times can also be accentuated by recent golden years.

Pointing out the need for a satellite view, Minert notes the alarming chart plunge follows the period of 2007 to 2013, which, for a large portion of the U.S. ag industry, was one of the most profitable periods in recent times. “We have to remember we are comparing this to an all-time best, which pushed up those working capital levels to extraordinary heights and makes the decline seem more exaggerated.”

Minert says the boom of 2007 to 2013 was unsustainable, but commodity markets were in the process of adjusting to a new normal when trade disputes with China in July 2018 rocked the boat again. “In the spring of 2018 we were projecting an improvement in farm incomes, then the trade dispute came along and disrupted things.”

On a positive note, commodity prices have strengthened significantly for 2019 and 2020. “This creates some optimism for returns to normal yields and an opportunity to market at profitable prices,” says Minert. He adds the USDA Market Facilitation Program (MFP) has helped mitigate some losses incurred due to trade disputes, but the future of these programs is uncertain and they are hard to bank on.

Minert says his recommendations have stayed consistent over the past few years: “Be pretty cautious, this is a challenging environment. Adjust to a tighter operating line, be prudent making capital investments, restructure debt and try and make adjustments to the new environment.”

The experts agree there are some very shiny silver linings to the current cloud storm.

“We will make it through this,” says Minert, “and it can create opportunities for new entrance.”

Wells says there are going to be some really big opportunities available for producers who can hang tight – especially young ranchers who are willing to live lean for a while.

“I always tell people, ‘When do you ever see opportunity come during good times?’ It’s those who are able to ride it out who will have some great breaks ahead.”