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  • Liquidity and Working Capital a Priority

    Liquidity and Working Capital a Priority

    Agricultural lenders listed liquidity and working capital as their top concern for producers this crop year, according to a survey conducted by the American Bankers Association and Farmer Mac last August. This is likely an indicator that lenders are seeing the outlook for lower commodity prices while at the same time retaining elevated input costs, including interest rates on operating notes. Because of the nature of agriculture, where there are months when cash outflows exceed inflows during the growing season, liquidity and working capital should be a priority every year, regardless of market outlook.

    Liquidity is a producer’s ability to meet their cash financial obligations as they become due. Working capital is a measure of liquidity that measures how much current assets exceed current liabilities. 

    Current assets and current liabilities are found on the balance sheet. Current assets include cash and other assets that can be converted to cash relatively quickly, while current liabilities include any debts that are due within a year or less. Some examples of current assets include cash, inventories of crops, market livestock, livestock products and supplies, accounts receivables, prepaid expenses, marketable stocks and bonds, and the cash value of life insurance. All of these can be quickly converted to cash to pay any debts that come due. Current liabilities are debts or obligations that must be paid within a year’s time or less, including accounts payable to merchants and suppliers, current notes payable and the current payments required on long-term notes payable to lending institutions.

    Liquidity, by definition, is related to cash flow. In agriculture, a pro forma cash flow statement is a great tool to estimate cash flows and working capital balances for the upcoming crop year, providing an idea of the approximate timing and size of inflows and outflows. Of course, it is difficult to truly predict the future. As a result, producers need to have an appropriate amount of working capital on hand to provide flexibility in meeting uncertain cash flows. 

    An example of this occurred during the planting season this year. The weather was unusually wet in some areas this past month, leading to saturated soils that caused seedling damage. Some producers had to make the decision to replant some of their fields. Those who had the working capital available were able to afford this unexpected cash outflow. Liquid reserves, by means of working capital, are necessary for the sustainable operation of the farm business every year.

    Sources/Resources:

    Fall 2023 Agricultural Lender Survey Results. (Nov 6, 2023). The American Bankers Association and Farmer Mac survey conducted August 2023. https://www.aba.com/-/media/documents/reference-and-guides/2023-ag-lending-survey-report.pdf Obtained online Jun 10, 2024.

    Smith, Amanda R. “Liquidity and Working Capital a Priority.” Southern Ag Today 4(26.3). June 26, 2024. Permalink

  • The Relative Value of Bred Cows

    The Relative Value of Bred Cows

    Many analysts expect the beef cattle industry to expand the cowherd in 2025. This won’t be confirmed until the release of the January 2026 Cattle Inventory Report. When herd expansion begins, replacement heifers and bred cows will become increasingly valuable. As one might expect, replacement heifer and bred cow prices are correlated with feeder cattle prices. 

    Cows that are open but otherwise healthy can enter two marketing channels: cull cow or bred cow markets. In most circumstances, cows leaving a cow-calf operation are sold as open cull cows. However, cyclical cattle inventories and supply dynamics provide scenarios where the value of bred cows dominates the value of open cull cows because of herd expansion.

    The orange line in the figure is the price of a Breaking 75-80% cull cow sold in Joplin, MO. Breaker cows correlated approximately to a cow with a body condition score of 7-8. So, a cow that is open but in good condition. The green line in the figure is the price of a cow that is 4-9 months bred and sold in Joplin, MO. The blue line is the price of a bred cow compared to that of a cull cow. A price ratio that is less than one indicates that a cow is worth more as an open cull cow. A price ratio greater than one indicates that bred cow value dominates cull cow value. An increase in the price ratio implies that bred cow prices have increased faster than cull cow prices. This increase in the ratio is a function of where the industry finds itself in the cattle cycle.

    Mitchell, James. “The Relative Value of Bred Cows.” Southern Ag Today 4(26.2). June 25, 2024. Permalink

  • Current Farm Bill Negotiations for the Marketing Assistance Loan Program

    Current Farm Bill Negotiations for the Marketing Assistance Loan Program

    The Nonrecourse Marketing Assistance Loan Program (MAL) is a marketing tool available for select commodities.  Authorized through Title I of the farm bill, MALs provide cash to producers at harvest to allow storage and marketing of the crop for a nine-month period following harvest.  Producers repay the MAL (with interest) or forfeit the crop that was pledged as collateral to the Commodity Credit Corporation (CCC).  MAL rates are defined in the farm bill for each eligible commodity and are thus a point of negotiation in farm bill debates. 

    On May 1, 2024, the Senate Majority released their farm bill position, which details an escalator based on the percentage increase in cost of production compared to the previous five years, as estimated by the USDA Economic Research Service (ERS).  There is a cap in the Senate Majority position of a 10% increase over the 2018 Farm Bill loan rates.  

    The House Committee on Agriculture then proposed new loan rates that are predominately 10% higher than the existing loan rates for the major crops listed in Table 1.  This proposal passed out of Committee on May 24, 2024.  Details of the two farm bill positions can be found in the May 24, 2024 Southern Ag Today article.

    The purpose of this article is to explore the differences between the Senate Majority position and the House Ag Committee bill, as well as to illustrate the degree to which the MAL can be used as a marketing tool to cover operating costs of production.  Table 1 shows the ERS cost of production estimates, FAPRI projected commodity prices, the current loan rate, and the proposed Senate and House MAL rates.  The “percentage increase in operating cost” compares the 2024 estimate to the five-year average 2019-2023 operating costs.  In all crops listed there is at least a 10% increase in operating costs compared to the previous five-year average, with rice operating costs estimated at a 16.7% increase.  Therefore, the Senate position would trigger the 10% cap on the increase in MAL rates.  This means that both the Senate position and House committee bill would result in the same loan rate at the present time for all but peanuts and cotton.  There is an additional $0.50/ton in the Senate position for peanuts compared to the House bill.  The calculation of the upland cotton loan rate is more complicated than illustrated in the Senate summary document.  The 2018 Farm Bill specifies a range of $0.45-$0.52/lb for the loan rate.  At a 10% increase, that would result in the Senate position of $0.50-$0.57/lb.  The House bill specifies $0.55/lb, thus being higher or lower than the Senate position, depending on how it is implemented.    Furthermore, the Senate position would require an annual calculation for all loan rates and then an adjustment based on the current 2018 Farm Bill loan rates. 

    The other question is the degree to which the MAL can be used as a marketing tool to provide short term funding compared to the operating cost of production for these crops.  Table 2 shows the ratio of the 2018 loan rate to the 2018 operating cost per unit.  For all but sorghum and upland cotton, the ratio was greater than 1.0, indicating coverage greater than 100% of the operating cost of production at the time the 2018 Farm Bill was written.  The Senate proposal at the 10% loan rate increase and the House bill produce the same ratios for all but upland cotton.  In both of these bills, there is a decrease in the ratio of the loan rate to the operating cost per unit for all crops other than barley and upland cotton.  In fact, corn, oats, rice, sorghum, and upland cotton all have a ratio below 1, indicating loan amounts less than 100% of the operating cost of production.  Farmers who use this marketing tool should consider this relationship to better understand how much of their operating costs can expected to be covered at harvest by this program.

    References

    Fischer, Bart. 2024. Battlelines Are Being Drawn: Comparing Current Farm Policy Proposals.  Available at: https://southernagtoday.org/2024/05/24/battlelines-are-being-drawn-comparing-current-farm-policy-proposals/

    Rabinowitz, Adam. “Current Farm Bill Negotiations for the Marketing Assistance Loan Program.” Southern Ag Today 4(26.1). June 24, 2024. Permalink

  • Animal Ag in the “Farm, Food and National Security Act of 2024”

    Animal Ag in the “Farm, Food and National Security Act of 2024”

    The Farm Bill proposal by Rep. Glenn “G,T.” Thompson has made it through the initial markup and passed through the House Agricultural Committee. While there is still a long road between now and what is ultimately enacted, there are a few provisions in the proposed bill of particular interest to folks in animal agriculture. 

    One proposed provision would prohibit states from setting conditions for sale on products derived from “covered livestock” that are different than those imposed by the state where the animal was raised.  As a reminder, the US Supreme Court recently ruled that states do have the ability to set sales restrictions, allowing California to enforce Proposition 12.  If this proposal is enacted, it would prohibit California (and Massachusetts) from enforcing their current sales restrictions.  Additionally, it would prevent other states (such as New York, which is considering a similar bill), from enforcing any in the future.  Note, however, that the definition of “covered livestock” in the farm bill proposal specifically excludes laying hens.  In other words, the provisions of Prop 12 covering pork and veal products would not be enforceable, but the provisions requiring cage free egg production would be.  Similarly, other states that have passed or are considering laws requiring specified types of production methods for egg laying hens could still enforce those requirements.

    Another proposed provision would create a pilot program allowing some custom exempt facilities to sell meat products directly to consumers.  “Custom exempt” does not require continuous inspection by a FSIS or state inspector during the slaughter process.  Currently, “custom exempt” meat cannot be sold, and is instead only available for consumption by the owner of the living animal.  More information on that here.  The proposal would allow participating custom exempt plants or customers who have animals processed at a custom exempt plant to sell the meat to the public, conditioned on the meat not being re-sold past the original buyer.  This pilot program would operate until 2029.

    The Farm Bill is still a moving target, and provisions may look very different when/if they are ultimately passed. However, both of these provisions would both have a significant impact for livestock producers and should be watched carefully during the process.  

    Rumley , Elizabeth. “Animal Ag in the “Farm, Food and National Security Act of 2024”. Southern Ag Today 4(25.5). June 21, 2024. Permalink

  • Government Incentives for Agricultural Generational Transfer? 

    Government Incentives for Agricultural Generational Transfer? 

    A transition plan outlines the process of transferring an agricultural operation from one generation to the next and includes details regarding transfer of both management (succession plan) and assets (estate plan).  Surveys and anecdotal evidence report low success rates for farm transitions and argue inadequate transfer plans or lack of a transfer plan explain the low success rates of agricultural operation survival, despite most producers’ desire to keep their farm or ranch in one piece and in the family.  Transition planning is difficult for many reasons, both logistical (requires time and resources such as accounting and/or legal help) and psychological (brings up thoughts of mortality and often involves tough decisions and conversations); therefore, producers tend to delay planning altogether.  

    We surveyed U.S. ranchers regarding plans to transition their ranch to the next generation and received a total of 148 responses, mostly from Texas (66.9%) producers.  Survey participants shared information about their operational structure, family dynamics, and details of their ranch transition plans or roadblocks preventing them from developing a plan.  Less than 40% of survey participants have a transition plan in place.  

    Chi-square tests for independence revealed relationships between some characteristics and the presence of a transition plan.  Results indicate a positive relationship between operational structure and succession planning, i.e., producers who have put in time and effort to organize their operation beyond a sole proprietorship are more likely to have a succession plan.  Results also indicate age and net worth each have a positive relationship with succession planning – we observed an increasing percent of respondents with a succession plan as net worth increased, until net worth reached $15,000,000.  

    Survey participants answered open-ended questions regarding their transition plans and roadblocks to planning – responses are summarized in Table 1.  Operational longevity in agriculture depends on the ability of farms and ranches to survive from one generation to the next.  Since evidence shows this process has proven difficult for producers, is there a role for the government to play in incentivizing the generational transfer of agricultural operations? 

    Table 1. Survey Results – Transition Planning Themes and Roadblocks

    Transition Planning ThemesRoadblocks to Transition Planning
    Utilizing a trust to protect and transfer control of assetsResistance from senior generation
    Plans to transfer ranch assets and management to on-farm heirs and personal assets of off-farm heirsLack of time or making time to plan
    Utilizing an LLC, corporation, or partnership to facilitate lifetime transfer of operationLack of knowledge/education in transition planning
    Utilizing an LLC, corporation, or partnership to create membership agreements and set restrictionsFinding professional legal/accounting help
    Lifetime, or inter vivos, transfer of shares (or interest) in the operation to heirs, whether purchased or gifted to the upcoming generationLegal fees
    Equitably dividing assets between on-farm and off-farm heirs
    Lack of a successor
    Difficulty managing lots of owners
    Difficult family dynamics/communication
    Difficult land or asset structure
    Estate tax considerations

    Graff, Natalie. “Is there a role for the government in incentivizing the generational transfer of agricultural operations?” Southern Ag Today 4(25.4). June 20, 2024. Permalink