Farm Horizons, August 2013
Is your balance sheet ready?
By Myron Oftedahl
Is your balance sheet ready for the year-end?
As I look toward the end of the year, I am becoming concerned about the effect that new crop prices will have on crop inventory values and the resulting values for current ratio and working capital.
The farm crisis of the 1980s was fueled by high debt to asset ratios and very high interest rates. The upcoming farm restructure will be fueled by the drop in current ratios and loss of working capital.
Let’s look at a sample farm that typically carries 80,000 bushels of corn, and 15,000 bushels of soybeans as inventory at year-end.
Jan. 1, we valued the corn inventory at $6.75 and the soybeans at $13. This gives us a value of corn at $540,000, and $195,000 for soybeans; or a total of $735,000 for grain inventory.
We are looking at year-end values of $4.50 for corn, and $11 for soybeans. This gives us a value of $360,000 for corn, and $165,000 for soybeans. This is a reduction of $210,000 of working capital.
Can your balance sheet withstand this loss of working capital? What are the implications?
The answer will vary from farm to farm, but some of the implications could be increased need for annual operating money, reduction of term debt capacity, and other liquidity ratios. It could mean stalling a major equipment upgrade for a year. This all leads to a higher credit risk, which, in turn, could lead to higher interest rates.
Is it all doom and gloom? No, but you need to be proactive.
You will need to have a frank discussion with your lender so that he/she understands what the impact will/could be for your operation.
We have faced this before, but you need to be aware of what is coming. Working capital is often referred to as your rainy day fund or your carrying fund, and that is what we will have to rely on in 2014.
How large should working capital be? Again, it will depend on your operation, and will vary from farm to farm.
One item that I learned at a recent conference is that current assets should have one year’s worth of land payments over and above working capital. So, if I go back to my Jan. 1, 2014 crop inventory and available cash and withhold one year’s worth of land rent and amortization payments, will I have a positive working capital and current ratio?
I would urge you to put this to the test and then sit down and explain this to your lender. If you need help, contact an area Farm Business Management Instructor for assistance.