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August 28, 2015
KFMA Research
Executive Summary
Solvency ratios are normally used as an indicator of the long‐term viability of the farm business. Farms with
high leverage have a greater likelihood of going bankrupt. Bankruptcy occurs because a farm loses its equity.
However, for a farm to lose equity, it must generate negative profits, which might imply that highly leveraged farms
are earning less profit than those farms without debt. Thus it might be possible to predict future profitability based on
solvency ratios. This paper tests that hypothesis but finds a naïve model of looking at past profit to predict future
profits works the better than using solvency ratios.
Introduction
The Farm Financial Standards Council currently lists 21 ratios that can be used to evaluate a farm business.
Three of these ratios are solvency ratios. Solvency ratios assess the amount of debt capital used by a farm business
and help determine whether the business can meet long‐term obligations. Any business that uses debt capital incurs
an obligation to make principle and interest payments. If a business has too much debt, periods of low profitability
can lead to insufficient cash flow to cover the principle and interest. Thus, the use of debt increases the financial risk
of a farm business and the likelihood the farm business might become insolvent.
While solvency ratios are designed to measure a company’s financial health, can they also be used to predict
future profitability? Because debt capital introduces interest expense to a farm business, net farm income will be
lower compared to a farm with just equity capital (everything else being equal). Going forward though, future net
farm income might not always be lower for higher leveraged farms as these farms may have taken on more debt in
order to fund profitable segments of their business.
Another potential complication of using solvency ratios to predict future farm profitability is farmland
control. As land is the most valuable asset class on most crop farms, controlling that land is an important decision.
Few farms have enough of their own equity to supply all the land they need without either purchasing land with debt
capital or renting land. Farms that have taken on more debt to purchase land will need to rent less land than a similar
farm with lower debt levels and farming the same acreage base. The interest rate and the cash rental rate, determine
Kansas State University Department Of Agricultural Economics Extension Publication …
July 16, 2018
Grain Market Outlook
of U.S. domestic corn and other feedgrains
will have the … Weekly Export Shipments week of 7/5/2018 for MY 2017/18 = 55.0 mb (Negative)
vs 70.9 mb/wk needed to meet USDA’s July 12th projn of 2.300 bb exports
… Weekly Export Shipments week of 7/5/2018 for MY 2017/18 = 0.472 mb (Bearish)
vs 4.8 mb/wk needed to meet USDA’s July 12th projn of 230 mb exports
…
May 8, 2020
Ag Law Issues
in price manipulation and other
practices deemed unfair … fruits, and groceries and many other commodities
not related … from using
or permitting others to use their distribution …
April 19, 2018
Agribusiness Papers
its income similar to any
other taxable corporation except … costs of goods sold and other expenses associated with … operating in any
structure other than a C-corporation receive …
December 8, 2023
Ag Law Issues
the issue. For businesses other
than those providing professional … distributed to the
member (other than guaranteed payments … million in distributions (other than guaranteed payments …
June 27, 2017
KFMA Research
capacity, firm size, and other business performance measures … assumed to have the capacity to meet credit
obligations. However … could impair their ability to meet credit obligations. Firms …
September 28, 2017
KFMA Research
adequate cash on hand to meet expenses and contribute to … for farmers.
The four other strategies as outlined by … replaced before it should and other equipment might be replaced …
June 19, 2023
Ag Law Issues
questions that I receive, others by cases that I read, yet … cases that I read, yet still others
simply from conversations … conversations that I have had with other recently. Those thoughts …
August 1, 2011
KFMA Newsletters
by drought,
flood, or any other natural disaster, or
the … eligible
for deferral if the other qualifications are met … qualifications are met.
The other point to clarify regards …
April 1, 2010
KFMA Newsletters
income statement, on the
other hand, is used to track financial … 37,360
Total Crop Income $157,174
Other Income:
Patronage Dividends … Insurance Proceeds 2,508
Total Other Income $9,151
Total Gross …