For the past five years, farm management has been easy. That's about to change.
Speakers at the 2014 Farm Futures Business Summit were clear and unified in their message. Profitability is no longer a guaranteed part of crop farming.
And those farmers who've grown at an extraordinary pace in recent years? They could be the most vulnerable in coming years.
University of Minnesota ag economist Bob Craven has a term for this group – Go-Go Farmers. Many in this group have sacrificed liquidity in order to secure more land and push their operational capacity to the max. It's made them extremely successful in recent years.
In most instances, the Go-Go Farmer will continue to adapt and find a way to persevere through tough times. By in large, luck has not been the lynchpin of the Go-Go Farmer's success.
"The good get better. The bad get worse," Craven notes. "And your lender knows this."
Here's the concern, cash on hand will be the saving grace as most wait for input costs to realign with commodity prices. Many of these hard-charging farmers are light on cash. It's part of taking more risk to grow the operation.
As folks burn through cash, Craven worries many will be forced to rely on collateral to meet operating expenses. "The problem with a Go Go Farmer is if they grow too fast, they don't have the financial wherewithal to withstand a challenging year," Craven adds.
To get a better handle on the farm's financial health, Craven recommends three key ratios. No surprise here, his first go-to indicator is the farm's debt-to-asset ratio.
Next, he likes to take a look at the operation's term debt coverage ratio. Lastly, Craven says evaluating working capital to gross income can help refine the overall picture by benchmarking working capital to the size of the operation.
One more word of advice: the farm's Schedule F statement should not be used to evaluate the farm's financial health. Craven highly recommends an accrual adjusted income statement to get an accurate look at operational performance. He notes a recent study found up to a 66% difference between a farm's Schedule F and accrual adjusted income statement.