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June 8, 2016
KFMA Research
the profitability of crop production changes from the expectations …
August 28, 2015
KFMA Research
2
whether renting or purchasing land is the most profitable option. However, even if purchasing land is more profitable
than renting, purchased land will not cash flow (Oltmans).
A third potential issue with accessing profitability using solvency ratios is the payment of loan principle. While
this does not affect profitability, the loan principle payment does take cash away from other areas where the cash
could be employed. Thus the loan principle could indirectly lower farm profitability.
As the preceding discussion indicates, it is not clear if solvency ratios can reliably predict future net farm
income. Given the easy with which the solvency ratios (particularly the debt‐to‐asset ratio) can be calculated, this
paper tests the ability of two solvency ratios to future net farm income. A positive result might indicate that a
solvency ratio could be used as a quick way to screen farms for future profitability.
Data and Methods
Data for this study comes from the Kansas Farm Management Association (KFMA) where farm information
has been collected since 1973. The KFMA program employs a set of field economists who typically assists 100 farmers
each to make management and tax decisions. As part of this process, farm‐level financial and production data are
collected and recorded. In this study, a panel data set of farms with 20 consecutive years of records was used (1995
to 2014).
For this study, three sets of comparisons were conducted. The first comparison divided farms into two groups
based on an initial debt‐to‐asset ratio. This initial debt‐to‐asset ratio grouping was based on the average debt‐to‐asset
ratio from 1995 through 1997. Each farm was then assigned to either the high‐risk group (i.e., the individual farm
debt‐to‐asset ratio was above the median) or the low risk group (i.e., the individual farm debt‐to‐asset ratio was
below the median). For each group the median net farm income per acre was computed for each year. The net farm
income per acre was used as a profitability measure to eliminate any size differences that net farm income might
cause.
The second comparison divided farms into two groups based on an initial solvency ratio. The solvency ratio is
not one of the 21 recommended FFSC ratios but it is a ratio commonly used with non‐agricultural businesses. The
solvency ratio is computed from net farm income plus depreciation and then divided by total debt capital. The
comparisons based on solvency were computed in a similar fashion to the debt‐to‐asset ratio comparison.
The final comparison was a baseline check to examine what would happen when dividing the farms into two
groups based just on the net farm income per acre. This constitutes the naïve model test. The comparison with
groups based on dividing by net farm income per acre was conducted similarly to the other two comparisons.
Kansas State University Department Of Agricultural Economics Extension Publication …
September 1, 2011
Beef Cattle
margin projections. Cost of
production, and corresponding cost of …
Employee and Employer Forms
Internal Revenue Service, Tax
Products Coordinating Committee, SE:W:CAR:MP:T:M:S …
September 1, 2011
Marketing Strategies
margin projections. Cost of
production, and corresponding cost of …
January 14, 2015
Commodity Program Presentations
Coverage up to 86%
• Same product as underlying
crop insurance (e.g. RP,
RP‐HPE, Y)
• …
January 18, 2012
Leasing Papers
and Presentations
2
Tables 1‐3 below report model‐estimated average pasture rental rates for 2012 based
upon feeder cattle and corn prices for the first several weeks of January. Both feeder cattle and
corn prices are significantly above long‐term averages. As stated above, absolute values of
rental rates can (and should) vary considerably for many reasons. Thus, what is relevant in
tables 1‐3 are not necessarily the absolute rates (i.e., $/head or $/ac), but rather the change
from last year. That is, producers and landowners should look at how rates are expected to
change and apply that to rates from last year (assuming the base rate last year was
appropriate). While the results vary depending on cattle type and grazing program, they
generally suggest an increase in rental rates of 1‐3% from last year’s rates. The average annual
percentage change for the previous 30 years has averaged roughly 1.5 to 2%, thus this suggests
pasture rates in 2012 are expected to increase, in percentage terms, similar to long‐term
growth rates. Given the high feeder cattle and corn prices, it might seem rates would be
predicted to increase by more than 1‐3%, however, the reason for the modest increase is
because model‐estimated rates were up significantly in 2011. That is, much of the effect of
high prices of feeder cattle and corn was captured in 2011 rates. Thus, if actual rates last year
(2011) did not increase as the model suggested, they possibly should increase more this year
than what is shown.
It is important for landowners to recognize that while the current economic conditions
(i.e., high cattle and corn prices) reflect conditions that suggest pasture rental rates will be
higher than longer‐term averages, rates may need to decrease if and when conditions go the
other direction. For example, if cattle and/or feed prices change significantly in the next 30‐60
days, producers and landowners may want to “plug” those values into the model to see how
that impacts projected rental rates. Likewise, if prices increase significantly before the grazing
season starts, then it may be that rental rates will need to increase more than what is shown in
tables 1‐3.
Another consideration for pasture rental rates for 2012 will be the condition of the
pasture. The model‐estimated rates in tables 1‐3 do not take into account the significant
drought conditions that persisted in much of southern Kansas in 2011 and possible lingering
effects for 2012. Thus, if stocking rates need to be reduced in 2012 due to poor forage
conditions, it might be that pasture rental rates on a per acre basis might actually decrease
from last year. This provides a good example why producers and landowners should focus on
the rental rate per head (or per pair) as opposed to the rate per acre. For example, the rate for
short season grazing program with stocker cattle weighing 500‐700 pounds is estimated to be
up 2.4% (table 3), but if stocking rate (head/acre) needs to be decreased then it could be that
the rate per acre might decrease even though pasture costs per head are expected to increase.
What is important is that landowners and producers communicate to make sure stocking rates
are adjusted if necessary so as to protect the long‐term productivity of the pasture.
…
July 20, 2015
Animal Health
starting with livestock and crop production through to the final consumer …
November 11, 2013
Marketing Publications
risk is a combination of
production risk (having a crop to deliver …