NDSU Publication Tracks N.D. Farm Financial Performance

The north-central and Red River Valley regions of North Dakota had sharp declines in nearly every measure of farm financial performance in 2005, but the south-central region had its strongest year and the west region its second best year during the past 10 years (1996 through 2005), according to Andrew Swenson, North Dakota State University Extension Service farm management specialist.

The publication "Financial Characteristics of North Dakota Farms, 2004 2005," contains highlights from a financial analysis of more than 500 farms enrolled in the North Dakota Farm Business Management program, along with useful benchmarks to evaluate the financial performance of farms of various types and sizes and in different regions. Farm financial trends during the past ten years also are presented.

“These benchmarks are in the form of 16 median financial performance figures, which include net farm income, debt to asset ratio, current ratio, term debt coverage ratio and interest expense as a percentage of gross revenue,” Swenson says.

Median size of farm and age of operator in 2005 for farms enrolled in the North Dakota Farm Business Management program was 2,000 acres and 46 years, respectively. Median gross sales were $281,667, although one out of every five farms had gross sales of more than $500,000.

“The median may be a better indicator of the typical farm because a few very large farms can significantly raise the average,” Swenson says. “For example, median net income was $42,286 in 2005, but the average was $58,461. The median is a midpoint; half the farms have a higher amount and half are lower.”

Although livestock farms and farms in the south-central region experienced their best profit in the past 10 years, statewide financial performance in 2005 was down slightly for the second consecutive year. It was a year of extremes. Positives were record yields of corn, soybeans, sunflowers and flax, and historically high beef cattle prices. Negatives were the highest input costs on record and weather-related production problems in parts of the state, particularly the northeast.

Swenson says it is typical for net farm income to be volatile. Year-to-year changes by region often exceed 50 percent. The 10-year high median net farm income was $49,181 in 2003 and the low was $14,290 in 1997. In 1997 and 1998, more than half of farms could not make scheduled term debt payments with the year’s income.

Regionally, Red River Valley farms usually display the best financial performance measures, but not in 2005. However, from 1996 to 2004, the Red River Valley had stronger profitability, solvency and repayment capacity measures than other regions. Although Red River Valley farms typically have smaller total acreage, they have higher total farm sales, assets and liabilities than farms in other regions.

Crop farms from 1995 through 2004 have been larger, as measured by gross sales, and have had better solvency and profitability than livestock farms. However, in 2005, livestock and mixed- enterprise farms had a better overall financial performance than crop farms. One measure of financial efficiency is the percentage of net farm income generated by each dollar of gross revenue. In 2005, for all farms, the median was 16 percent, but for livestock farms, the median was 28 percent. At 16 percent, it would take $312,500 of gross revenue to generate $50,000 of net farm income.

“One financial measure that improved each year from 1998 to 2003, regardless of region or farm type, was interest expense as a percent of gross revenue,” Swenson says. “However, because of higher interest rates, this trend reversed in 2005. Median interest expense as a percent of gross revenue increased from 5.6 percent to 6 percent.”

A strong relationship between sales volume and financial performance existed during the 1996- through-2005 period. Net farm income, rates of return on assets and equity, asset turnover, measures of liquidity, and repayment capacity and solvency typically improved with sales volume. For example, in 2005, farms with sales less than $100,000 were three times as likely to have a debt-to-asset ratio higher than 70 percent than were farms with sales greater than $500,000.