Financial Structure of Farms

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

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

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

Enormous Differences in Farms

• Philosophy behind operation– Farm is a business– Farm is a way of life

Enormous Differences in Farms

• Most are sole proprietorships• Some partnerships• Some corporations

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

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

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

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

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?

Conclusion

• Financial planning must be individualized– Enormous differences between farms in size, type

and financial performance• Basically a Financial “Agricultural Work Site

Assessment”

“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

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

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

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

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

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

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

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

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

Conclusion

• Great deal of risk in production agriculture– Makes planning very hard– Need to evaluate a range of outcomes when

making a decision

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

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

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

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

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

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!

Many Strategies for Agricultural Producers

• Commodity strategies– Oriented toward expansion– Oriented toward being low cost producer

• Innovative strategies– Develop unique product– Niche oriented markets

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

Farm Analyst Program

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

Farm Analyst Team Members

• Duane Hund, Paxico 785-636-5462 dhund@ksu.edu

• Coy Allen, Wichita 316-688-5313 ksucoyallen@att.net

• Fred Armstrong, Lakin 620-355-7338 accs@pld.com

• LaVell Winsor, Grantville 785-313-4974 lwinsor@ksu.edu

A comprehensive whole farm financial planning and analysis system

• FINAN Annual Financial Analysis

• FINLRB Financial Long Range Planning

• FINFLO Monthly Cash Flow Planning

• Annual Plan Annual Cash Flow Planning

FINPACK Components

Kansas Farm Management Association Program

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

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

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

KAMS Mediator Training

Kansas Farm Management Association Program

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 kherbel@ksu.edu

K-State Master of

Agribusiness

A Decade of Developing Agribusiness Leaders www.mab.ksu.edu u 785-532-4495

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

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

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

MASTManagement, Analysis & Strategic

Thinking

Kevin C. DhuyvetterTerry L. KastensAlicia Goheen

Department of Agricultural EconomicsKansas State University

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

The MAST Target• Audience

– Progressive farm managers– Agricultural professionals supporting agriculture

• Lenders• Agricultural agents• Farm managers• Accountants

How MAST Works• Components

– On-campus sessions– Distance learning modules

• PowerPoint presentations• Tegrity lectures

– Chat sessions– Message boards– E-mails– Phone calls

Contact Information for MAST

• Contact Alicia Goheen at agoheen@agecpn.ksu.edu

• Visit the Agricultural Economics Web site:AgManager.info

Questions?