NEWS for North Dakotans
Agriculture Communication, North Dakota State
University
7 Morrill Hall, Fargo, ND 58105-5665
March 5, 1998
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
Let's talk about this winter's financial stress in the state of North Dakota.
As North Dakota producers start putting together their 1998 plans, many are finding that their proposed farm plans will not cash-flow. This appears to be most common in Northeastern North Dakota where the state had the most crop diseases this last year, and in areas that have experienced severe crop diseases over the past several years. In fact, some North Dakota farmers have not had a good wheat crop for three to five years. Cash flow problems typically stem from having such poor yields that they are unable to pay back all operating loans for that year. In some cases, operating loans for the last several years were converted to term loans in the following years. After a couple of years of added term loans, it is very hard to project enough cash income from 1998 crops, based on average or even above-average yields, to cover 1998's operating loan along with amortized payments of the preceding years' operating loans. This snowballing effect of rolling operating loans into the next year is starting to takes its toll on North Dakota's farms and ranches.
Three years of low beef prices have also taken their toll on North Dakota's beef farms and ranchers. Couple three years of low beef prices with the tough 1996/1997 winter, the spring snow storm losses, and the open cows this fall, and you will find some North Dakota ranchers that are also experiencing projected cash flow problems for the 1998 business year. Whole herd liquidations have been fairly common over the last two years. USDA data suggests that 300 North Dakota beef herds were liquidated during 1997. I contend, however, that a majority of these have been retirements.
Finally, selected areas of North Dakota had a drought in 1997. This is causing some cash flow projection problems in the drought areas of the state. In summary, 1998 is starting out as a tough, tough year in North Dakota.
Cash flow projection problems are an early symptom of more serious financial stress to come. As any one year's operating debt is rolled into the next year's term debts, the overall financial structure of the total farm or ranch business deteriorates. The balance sheet or financial statement is used to measure the financial well-being of a farm or ranch business.
Before you do anything else related to your cash flow problems, you need to ensure that you have documented exactly where your farm or ranch business is financially. This means that you need to prepare a balance sheet as of Jan. 1, 1997, and a second balance sheet as of Jan., 1998. These balance sheets are snapshots of the business for that one day. You need your farm or ranch business assets divided into current, intermediate and long-term assets.
Current assets are those assets that will be sold in one year or less—an example is grain in the grain bin. Intermediate assets have an expected life of 1 to 10 years—an example is the breeding herd. Long-term assets have an expected life of over 10 years—an example is farm and pasture land. Your farm or ranch liabilities should also be divided into short, intermediate and long-term liabilities.
You use these two balance sheets to calculate key financial indicators for your farm or ranch business. The first financial indicator that you want to prepare deals with your family's overall net worth in the farm or ranch business. Calculate this by subtracting total farm or ranch business liabilities from total assets. This gives you an indicator of the absolute assets your family owns. Do this for both the Jan.1, 1997, beginning balance sheet and the Jan. 1, 1998, beginning balance sheet which then serves as the ending 1997 balance sheet.
Did your net worth increase or decrease during 1997? You answer this by comparing your net worth on Jan. 1, 1998, and on Jan. 1, 1997.
A second financial indicator is the percentage of the total assets owned by the farm or ranch family. This can be calculated by taking total farm or ranch assets minus total farm or ranch liabilities and dividing that number by the total farm or ranch business assets, and multiplying that answer by 100.
A third financial indicator is the percent in debt. Calculate it by taking the percent of the total assets owned by the farm or ranch family and subtracting it from 100. This calculation gives you the percent of the assets owned by the banker.
We typically measure financial well-being of a farm or ranch business based on the percent in debt. If the farm or ranch family owns 60 percent or more of the total business assets and the banker owns 40 percent or less of the assets, the business is considered to be financially sound. If the farm or ranch family owns 40 to 60 percent of the business assets, implying that the banker owns from 60 to 40 percent, the farm or ranch is considered to be under some financial stress. If the farm or ranch family owns under 40 percent of total business assets, and the banker owns 60 percent or more, the business is considered to be under severe financial stress.
A well-balanced financial statement will have sufficient assets in each asset category—short-term, intermediate and long-term—to meet the liabilities of each respective category. The most important of these three categories is the short-term. Be sure that your short-term liabilities on each balance sheet include that year's annual principal and interest payments for all intermediate and long-term debts to be paid during the year. The difference between your short-term assets and your short-term liabilities is referred to as working capital—the fourth financial indicator. You need sufficient working capital to cover your short-term liabilities. Without sufficient working capital, you will not cash-flow.
A fifth financial indicator is a measure of your intermediate-term capital. It is the sum of your short- and intermediate-term assets with your short- and intermediate-term liabilities subtracted out. This figure needs to be positive to have a well-balanced financial statement.
A sample balance sheet, and its supporting tables, is on my web page http://www.ag.ndsu.nodak.edu/cow under the button "Harlan's Handouts." If you do not have access to the internet, you may request a printed copy from Sandy, my secretary, at (701) 231-8642 or your can e-mail Sandy at agecon@ndsuext.nodak.edu. This sample balance sheet has several supporting schedules designed to help you prepare a more accurate balance sheet.
My next Market Advisor will provide some benchmarks that you can use to evaluate your farm or ranch business's financial well-being. Stay tuned.
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Source: Harlan Hughes (701) 231-7380
hhughes@ndsuext.nodak.edu
Editor: Barry Brissman (701) 231-7866
Click here for a pdf version of this graphic.