Financial Stress among Farm Firms: Discussion

Abstract

The three papers provide a good description of the current financial problems, the impacts of monetary and fiscal policies and farm programs, and possible short-term solutions to financial stress in agriculture. The authors are to be commended for an excellent set of papers, although there are omissions and weaknesses in each paper. Jolly, Paulsen, Johnson, Baum, and Prescott (JPJBP) provide an interesting synopsis of financial stress in agriculture. Their focus on only two measures of financial stress (debt-to-asset ratio and negative net cash flow) is the weakest part of their paper. Other measures of financial conditions could include the levels of and changes in net worth and net farm income, the number of bankruptcies and foreclosures, and the number of voluntary or involuntary liquidations. Such measures would provide additional guidance and insights to the financial problems. The proportion of farmers with negative net cash flows in any one year is not a reliable measure of financial stress. For example, a wealthy farmer who builds inventory in anticipation of better prices may show a negative net cash flow. In contrast, a financially strapped farmer may sell a significant portion of inventory and generate a positive net cash flow. Negative net cash flows indicate serious financial stress only if they persist over an extended period of time. Unfortunately, the JPJBP paper provides no evidence of how many farm operators have consistently experienced negative cash flows. The initial paragraph in the Hughes, Richardson, and Rister (HRR) paper suggests that management skills affect financial stress in agriculture. However, there is no further mention of management in the paper, so I will share some results of our work on this issue. Our research shows that an Illinois cashgrain farm with average management (management skills are based upon returns per dollar of input) and an initial debt-to-asset (D/A) ratio of 50%, is likely to experience significant reductions in net worth and negative net farm income under current economic conditions (table 1). However, managers ranked in the top 25% achieve crop revenues which are approximately 12% above average and have production expenses, excluding interest, more than 11% below average. With superior management, a cash-grain farmer with a D/A ratio of 50% can survive current economic conditions. However, a superior production and marketing manager saddled with a D/A ratio of 80% cannot survive current economic conditions (table 1). Disaggregate analyses of macroeconomic and farm policies are explored in the HRR paper using a firm-level simulation model. The results appear useful in analyzing the impact of public policies on individual farm firms. However, the large differences in growth in net worth and average annual net cash income among farm types raise serious questions about whether regional shifts in production are likely to occur. Brake and Boehlje (BB) have the unenviable task of suggesting solutions to the current financial stress in agriculture. Their paper identifies five adjustments for a financially stable agriculture: (a) lower interest rates, (b) mothball excess capacity, (c) lower resource values, (d) reduce debt, and (e) restructure asset ownership. While each of the five adjustments would improve conditions in agriculture, it seems questionable whether all five are needed for financial stability. For example, sector level debt is just over 20% of asset values. It is not the level of debt which is the problem, rather it is the distribution of that debt. Likewise, lower interest rates would improve incomes, but it is possible for agriculture to prosper and survive under current interest rates. Perhaps the most useful contribution of the BB paper is the five-step sequence of adjustments for firms experiencing financial stress. David A. Lins is a professor of farm financial management at the University of Illinois.