Financial Vulnerability of Midwest Grain Farms: Implications of Price, Yield, and Cost Shocks

Abstract

Recent years have witnessed increasing volatility in crop prices and yields, fertilizer prices, and farm asset values. In this study, the financial performance of illustrative Midwest grain farms with different scales, tenure status, and capital structures was examined under the shocks of volatile crop prices, yields, fertilizer prices, farmland value, and cash rent. Illustrative farms of 550, 1200, and 2500 acres were constructed reflecting the production activity for these farms with three different farmland ownership structures (15%, 50%, and 85% of land owned) and two capital structures measured by debt-to-asset ratio (25% and 50%). Absolute measures and financial ratios were used to evaluate the income, cashflow, debt servicing and equity position of these illustrative farms. The “stress test” results suggest that farms with modest size (i.e. 550 acres) and a large proportion of their land rented are very vulnerable irrespective of their leverage positions. Large size farms with modest leverage (25% debt-to-asset ratio) that combine rental and ownership of the land they operated have strong financial performance and limited vulnerability to price, cost, yield, and asset value shocks. And these farms can increase their leverage positions significantly (from 25% to 50% in this study) with only modest deterioration in their financial performance and a slight increase in their vulnerability. These results suggest that the perspective that farmers are resilient to price, cost, yield and asset value shocks because of the current low use of debt in the industry (an average of approximately 10% debt-to-asset ratio for the farming sector) does not adequately recognize the financial vulnerable of many typical family farms to those shocks.