long-run trends in profitability and farm size michael langemeier dept. of ag. econ. kansas state...
TRANSCRIPT
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Long-Run Trends in Profitability and Farm Size
Michael Langemeier
Dept. of Ag. Econ.
Kansas State University
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Introduction
• Three concerns revolving around current credit crisis– Financial Stress
• Negative Return on Equity• High Debt to Asset Ratio
– Divergence of Farm Performance– Government Bailout
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First ConcernFinancial Stress
• Even with the strong financial performance of the last couple of years there are still a substantial number of farms with either a negative return on equity, a high debt to asset ratio, or both.
• Upcoming Slides– Current financial position– Vulnerabilities– Financial stress
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Trends in Net Farm Income
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Financial Efficiency Measures
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Non-Irrigated Crop Enterprises
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Cow-Calf Enterprise
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Backgrounding Enterprise
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Trends in Liquidity
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Trends in Liquidity
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Trends in Solvency
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Potential Vulnerabilities in 2009
• Input price increases
• Farmland value volatility
• Overall debt structure and solvency of some farm businesses
• Access of farm households to credit
• Off-farm income during a national recession– USDA-ERS, December 2008
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Financial Stress
• The USDA-ERS defines vulnerable farms as those with a negative net farm income and a debt to asset ratio above 0.40.– U.S. Farms, 2007
• 3.5% of farms are vulnerable
– KFMA Farms, 2007• 6.8% of farms are vulnerable
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Financial Stress
• Financial stress is often measured by examining farms with a negative return on equity and a debt to asset ratio above 0.70.
• KFMA Farms, 2003 to 2007 Averages– Negative Return on Equity = 40.33%– High Debt to Asset Ratio = 13.04%– Financially Stressed = 7.03%
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Profit Margin Ratio
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Financial Stress
Measure
Average Benchmark
Negative ROE 40.33% 0.37%
High Debt 13.04% 7.41%
Financial Stress 7.03% 0.37%
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Financial Stress
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Second ConcernDivergence of Farm Performance
• Recent thesis by Lindsey Snider– KFMA Data
• Five-year snapshots from 1973 to 2007• Data sorted into deciles using value of farm production• Variables
– Total Acres– Economic Total Expense Ratio– Operating Profit Margin Ratio– Asset Turnover Ratio– Percent Income from Livestock
• Changes in economies of size
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Total Acres
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Economic Total Expense Ratio
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Operating Profit Margin
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Asset Turnover Ratio
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Percent Income from Livestock
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Economies of Size
• Five-Year Snapshots– 1973 to 1977– 1978 to 1982– 1983 to 1987– 1988 to 1992– 1993 to 1997– 1998 to 2002– 2003 to 2007
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Changes in Economies of Size
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Third ConcernGovernment Bailout
What is the Real Cost
of the Great Bailout
of 2008-2009???
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Possible Impacts
• Inflation
• Interest Rates
• Social Security and Medicare
• Economic Freedom– Government funds typically come with “strings attached”
– Government dominated economies tend to have slower economic growth
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Contact Information
• Michael Langemeier
– Ag Manager Contributor site• KFMA Newsletter• Credit Crisis References