American farmers have been squeezed since the end of the commodity boom.
Half fell into unprofitability in 2016, but since then government payments have kept most in the green.
“That is going through the roof in this environment,” Nate Franzen of First Dakota National Bank said in a May 20 Granular Ag farm economics discussion about direct payments to farmers.
The COVID-19 crisis is hitting some sectors of agriculture particularly hard, especially livestock producers, but for crop growers, market weakness today is being piled on top of years of low prices since 2014.
Franzen and fellow agricultural economist David Widmer of First Harvest Farm Management said farm profitability has slid as crop prices fell to a lower range, and that is showing up clearly on farmers’ balance sheets.
“We’ve been burning working capital,” said Widmer.
Franzen said farm profitability hit its worst level since 2002 in 2016, when only 50 percent of his bank’s clients were profitable. Last year that had recovered to 61 to 64 percent able to eke a margin above all costs and 78 percent able to pull a profit above operating costs alone.
That recovery was due partly to the surge in U.S. government payments for farmers, including compensation for damage from the U.S.-China trade war.
Widmer said government payments, excluding crop insurance, equalled about 25 percent of U.S. farm net profits last year and could surge this year to 30 to 40 percent.
That makes government payments a key element of today’s farm sustainability, Franzen said. However, since it is ad hoc and unpredictable, it’s hard to factor into farm financial plans.
For farmers, it’s best to build plans around tangible estimates of costs and revenue and then hope the government aid appears.
“Have some faith that that’s the upside for you,” said Franzen.
The unpredictability makes future profitability projections murky.
“All these funds are helpful, but today producers have no information they can put into their income sheet projections,” said Widmer.
He urged farmers to carefully analyze their financial situations and track them.
“You have to know where you stand today,” said Widmer.
Franzen said his bank sees better results from farmers who establish farm budgets and then regularly update them.
Those kinds of farmers “make better decisions, more timely, and end up the year in a much better position,” said Franzen.
Farmers often focus on key performance indicators, which help them know their costs of production.
However, Franzen said they should also consider key risk indicators.
Farmers should then find whatever ways they can to improve those indicators to lower costs, increase production and minimize risk.
“It’s about singles, not home runs,” said Franzen.
Some management can be painful. Franzen said farmers might need to consider selling assets to improve their financial ratios.
“Sometimes we don’t like to try to reduce leverage because it means we have to sell some things that we like and we don’t want to sell,” said Franzen.
“But sometimes that’s the best decision we can make.”
Widmer said the outlook for prices and profit is more opaque than ever, so farmers will have to get ready to manage without a clear view of the future.
“We’re just getting started with the uncertainty,” he said about the general world economic situation during COVID-19.
“We’re off the charts here.”