University of Illinois agricultural economist Gary Schnitkey indicated yesterday at the farmdoc daily blog (“Working Capital Buffers Gone at End of 2016“) that, “As was forecast, working capital on farms decreased during 2015 (see farmdoc daily, October 6, 2015). Given 2016 income prospects, further decreases in working capital should be expected. At the end of 2016, most of the working capital reserves built during high-income years from 2007 to 2013 will be gone. Working capital levels will again be at levels comparable to 1996 through 2006. In 2015 and 2016, working capital reserves were used to fund cash flow shortfalls coming from operations. If prices remain low through 2017, means other than reducing working capital likely will be needed to address cash shortfalls.”
Yesterday’s update noted that, “From 1996 to 2006, low profit margins existed on most Illinois farms, and the current ratio averaged 1.76 (see Figure 1). Between 2006 through 2012, the average current ratio increased, reaching a high of 2.87 at the end of 2012 (see Figure 1). From the 2012 high, the current ratio decreased: 2.49 at the end of 2013, 2.28 in 2014 and 2.05 in 2015.”
“Changes in these current ratios are highly correlated to net farm incomes (see Figure 2). During the period between 1996 through 2002, net income averaged $39,000 per farm on grain farms enrolled in FBFM. During this same period, the current ratio averaged 1.72. Net incomes were higher in 2008 to 2012, with increasing net incomes from 2010 through 2012. The highest net income of $298,000 occurred in 2012, the same year that the current ratio hit its maximum of 2.87. Since 2012, incomes have decreased and current ratios have decreased as well. The correlation coefficient between average net farm income and the current ratio is .88.”
Dr. Schnitkey explained that, “Incomes will be low in 2016; however, most farmers will have the financial reserves to deal with cash shortfalls. Many farmers will again reduce working capital.
“However, working capital reductions could present issues in the future. After the end of 2016, many farms will not have large working capital reserves compared to historical levels. If 2017 is a low-income year, cash shortfalls will again occur. Working capital reserves may no longer be large enough to cover cash shortfalls. Farmers may have to use other methods of meeting cash shortfalls including 1) refinancing short-term debt into longer maturity debt and 2) liquidating assets. Lenders may seek FSA guarantees for operations that are becoming financially questionable.
“A gauge of whether low incomes will continue are commodity prices. As long as corn prices remain below $4.00, working capital and financial situation on grain farms in the Midwest can be expected to deteriorate.”
