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Financial Structure of Farms
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What is a Farm?
• Definitions of a farm– > $1,000 in sales– > 10 acres– > 1 acre
• About 2 million “farms” in the U. S.– Many are small farms or “Hobby Farms”
• Beginning farmers• Retiring farmers• Limited resource farmers
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Enormous Differences in Farms
• Differences in size– Small end -- $1,000 in sales, “Hobby Farms”– Middle size – Represented by data from Kansas
Farm Management Association– Large size-- 000’s of acres, many employees, many
profit centers for the business
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Enormous Differences in Farms
• Enterprise mix– Expansive dry land crop (Western Kansas)– Irrigated crop– Highly productive Corn/Soybean country– Specialty crops—vegetables, fruits, etc.– Livestock
• Confinement hog operations• Ranches—over many acres• Feedlot
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Enormous Differences in Farms
• Philosophy behind operation– Farm is a business– Farm is a way of life
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Enormous Differences in Farms
• Most are sole proprietorships• Some partnerships• Some corporations
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Conclusion
• Because farms are so different, work for a farm must be highly individualized—has to be a specific plan designed for a specific farm
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Financial Management
• Several financial management models in use– Checkbook model—Business is okay as long as
there are more checks in the checkbook– Credit card model—Business is okay as long as the
credit cards work (can get operating loans)– Billfold model—Business is okay as long as there is
cash in the billfold—sell more products when need the money
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Financial Management
• Cash Basis recordkeeping—keep track of cash expenses, cash receipts, and depreciation– Farms (sole proprietorships) are allowed to pay taxes
on cash basis– Much lending occurs based on income tax forms– Need several years of income tax forms to get a clear
picture of the business profitability• May be selling business to generate cash, and not be
profitable at all• Inventory adjustments are not captured, so inventory
changes may be masking business problems
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Financial Management
• Accrual basis for accounting• Used by Kansas Farm Management
Associations• Captures cash income and expenses,
depreciation, and inventory changes• Calculates “Net Farm Income” which is a
return to equity, unpaid labor and management
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Financial Planning
• GOALS provide foundation for financial planning
• Then determine “where the business is”—develop a Net Worth Statement
• Then develop an Income Statement—is income being generated such that you can get to your goals
• Then develop a cash flow budget—will the operation cash flow for the plan developed?
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Conclusion
• Financial planning must be individualized– Enormous differences between farms in size, type
and financial performance• Basically a Financial “Agricultural Work Site
Assessment”
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“Average Farm” in KFMA
• 1,900 total acres (1,300 crop acres)• Total Assets of $1.2 million ($330,000 debt)• 1.4 workers including one operator• Gross livestock income of $70,000• Value of farm production of $300,000• Total Farm Expense of $250,000• Net Farm Income of $50,000• Family Living Expenses of $50,000
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Accrual Net Farm Income
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
($20,000)
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
Kansas Farm Managment Association Accrual Net Farm Income, 1980-2007
$/F
arm
1980's Average $18,087
s Average $37,441'1990
2000's Average $52,320
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Net Farm Income By Group
High 25% High Middle Low Middle Low 25%-$100,000
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
Kansas Farm Management Association 2007 Income-Expense Comparison by Net Farm Income
Value of Farm Production Value of Livestock Produced Total Farm ExpenseNet Farm Income
Net Farm Income Group
$/F
arm
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Profit Margin in Farming
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Kansas Farm Management Association Total Expense Trends, 1998-2007
Total Farm Expense Total Expense Ratio
$ /
Fa
rm
Ex
pe
ns
e /
$ F
arm
Pro
du
cti
on
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Family Living Expenses
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
Kansas Farm Management Association Family Living Analysis, 1998-2007
Income Tax Family Living Expenditures Net Farm Income
$ /
Fa
rm
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Conclusions
• Margins on average are very small– Cash returns are not large enough, in general, to
pay for the investment– A considerable portion of the return in agriculture
is “increases in land values”– “Best” producers do substantially better than
“worst” producers (huge range)• Many years Net Farm Income does not cover
Family Living Expenses
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Profitability of Cowherd
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007-$100
-$50
$0
$50
$100
$150
$200
$250
Kansas Farm Management Association Beef Cowherd - Sell Calves
Return over Variable Cost per Head
$ /
He
ad
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Profitability of Beef Backgrounding
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007-$75
-$50
-$25
$0
$25
$50
$75
Kansas Farm Management Association Beef Backgrounding
Return over Variable Cost per Head
$ /
He
ad
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Profitability of Hog Production
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007-$10
$0
$10
$20
$30
$40
$50
$60
$70
Kansas Farm Management Association Sow & Litter, Sell Market Hogs
Return over Variable Cost per Head
$ /
He
ad
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Conclusion
• Great deal of risk in production agriculture– Makes planning very hard– Need to evaluate a range of outcomes when
making a decision
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Market Structure in Production Ag
• Producers are “price takers” rather than “price makers”
• Different than many industry structures• Many relatively small (compared to the size of
the whole market) producers
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Economic Principle
• Gross returns and total economic expenses tend to be pulled together over time in production agriculture
• Result is no “Economic profit” in the long run in theory
• Bottom line is that new investments just barely pay (at best) in many circumstances– Total of cash return and appreciation needed to cover
investment cost in land, for example– “Profits” get bid into land values if/when they occur
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Producers must cope with great risk
• Extreme variability in prices for products, costs of inputs, and production (yields)
• Rule of thumb: imagine the worst and if that is okay, go with it
• Risk encourages a tendency to cut costs– Dollar saved is a dollar in the pocket– Dollar invested may or may not earn much
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Investments in producer enhancements
• How does it fit with Goals of operation?• What is the return on the investment?• Low margins in general• Tendency to emphasize cost reduction• Tax implications (only make investment a little
cheaper)– May be deductible– May be depreciable
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What to do when a disability occurs?
• Need to consider a really broad range of options
• Difficult to dream up all the possibilities• Need to think as innovatively as possible
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Many Options in Production Ag
• Land market—rent the land to another operator
• Custom hire for machinery operations• Harvest• Planting• Spraying
• Services provided by Coops• Minimum tillage options• Grow a garden and go fishing!
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Many Strategies for Agricultural Producers
• Commodity strategies– Oriented toward expansion– Oriented toward being low cost producer
• Innovative strategies– Develop unique product– Niche oriented markets
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Sources of Help
• Services for Producers– Farm Analyst Program– Kansas Farm Management Associations
• Educational Programs– Masters of Agribusiness (MAB) Program at Kansas
State University– Management and Strategic Thinking (MAST)
Program offered by Extension Faculty– AgManager.Info is the department Web site
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Farm Analyst Program
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Role of Farm Analyst
Duane Hund-farm analyst for the Department of Agricultural Economics and coordinator of the program-serves the needs of families referred from the Kansas Agricultural Mediation Service-uses Finpack software program to help families develop strategies to improve their profitability -has worked with over 800 Kansas farm families in the past 23 years
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Farm Analyst Team Members
• Duane Hund, Paxico 785-636-5462 [email protected]
• Coy Allen, Wichita 316-688-5313 [email protected]
• Fred Armstrong, Lakin 620-355-7338 [email protected]
• LaVell Winsor, Grantville 785-313-4974 [email protected]
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A comprehensive whole farm financial planning and analysis system
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• FINAN Annual Financial Analysis
• FINLRB Financial Long Range Planning
• FINFLO Monthly Cash Flow Planning
• Annual Plan Annual Cash Flow Planning
FINPACK Components
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Kansas Farm Management Association Program
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Over 2,300 farm operations representing over 3,000 farm families
Valuable analysis databankOver 1,550 farms for 2006
20 Extension Agricultural Economists in six associations
Kansas Farm Management Association Program
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Kansas Farm Management AssociationVision/Mission . . .
Deliver educational programs and technical information
Integrated research, analysis and education
Improved economic choices and management decisions of individuals, families, farms
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Develop a sound farm accounting system
Whole-farm and enterprise analysis
Comparative and trend analysisIntegrate tax planning,
marketing and asset investment strategies
Assistance in understanding financial information for making decisions
Kansas Farm Management Association Program
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KAMS Mediator Training
Kansas Farm Management Association Program
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For More Information
Kansas Farm Management Association (KFMA)www.kmar105.com/kfma
Extension Agricultural Economicswww.agmanager.info
Kevin L. Herbel Office: 785-532-1513308 Waters Hall Cell: 785-532-8706 Manhattan, KS 66506 [email protected]
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K-State Master of
Agribusiness
A Decade of Developing Agribusiness Leaders www.mab.ksu.edu u 785-532-4495
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Distance education with a twist
• Professional master’s degree in business and economics that focuses on food and agribusiness management
• 2 ½ year program– 2 years of coursework– Last 6 months developing professional thesis
• Delivered executive-style to working professionals through– Internet– CD-Rom & DVD– Pod-Casting– Multi-audio chat system– On-campus sessions
KANSAS STATE UNIVERSITY
MASTER OF AGRIBUSINESS
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Who is an MAB student?
• Technical background in food discipline and want to gain business and economic skills
• Business or liberal arts background, entered a career in food or agribusiness and need to better understand the industry
• Entered a management role and need to broaden their managerial skills
• Wish to update their technology skills
KANSAS STATE UNIVERSITY
MASTER OF AGRIBUSINESS
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Who is an MAB student?• Students and alumni from more than 35 states and 20
countries abroad• Employed in all sectors of the food and agriculture industry• More than 100 graduates
KANSAS STATE UNIVERSITY
MASTER OF AGRIBUSINESS
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MASTManagement, Analysis & Strategic
Thinking
Kevin C. DhuyvetterTerry L. KastensAlicia Goheen
Department of Agricultural EconomicsKansas State University
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What is MAST?• Innovative farm and risk management
educational program combining face-to-face workshops with distance learning
• Offers depth not available in typical one- to two-day programs
• On-campus sessions and distance modules
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The MAST Target• Audience
– Progressive farm managers– Agricultural professionals supporting agriculture
• Lenders• Agricultural agents• Farm managers• Accountants
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How MAST Works• Components
– On-campus sessions– Distance learning modules
• PowerPoint presentations• Tegrity lectures
– Chat sessions– Message boards– E-mails– Phone calls
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Contact Information for MAST
• Contact Alicia Goheen at [email protected]
• Visit the Agricultural Economics Web site:AgManager.info
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Questions?