Tag: NFI

Is Net Farm Income Affected by Debt Levels?

# Introduction
Net Farm Income (NFI) is probably the ultimate measure of farm success. Farms that generate an adequate income can cover family living expenses and will remain viable operations. Farming requires a substantial amount of capital though for the business to function. Debt capital is used by nearly every farmer but farms vary in their use of debt. Debt capital is not free and any interest expense will lower NFI. However, debt capital can help a farm become larger which could improve net farm income. In the paper AgManager GI-2018.8, I examined farms by quintiles based on the D/A ratio to determine the level of risk for farmers in the Kansas Farm Management Association (KFMA) program. While there is a wide range of debt levels among farms, there is a question about how this debt affects farm profitability. This paper examines the net farm income by quintiles of the D/A ratio.

# Procedure
To generate the quintiles, the D/A ratio for all the farms each year are ranked in order from highest to lowest. The 20 percent of farms with the highest D/A ratios are put into group one, the next highest set of D/A ratios are in group two, etc. The bottom 20 percent of farms with the lowest D/A ratios would be in group five. Once the grouping of farms is established, the average net farm income for each group is calculated.

# Results
Figures 1 and 2 show the average net farm income for the different quintiles. The results are broken into two parts to make the trends easier to read. Prior to 2006, most farms had NFI below $100,000. After 2006, the increase in grain prices greatly increased the NFI of all quintiles. Thus, 2006 made for a good point to divide the results. Notice that the two figures have different Y-axis scales. Figure 1 also has removed quintile groups 2 and 4 to make it easier to read. Groups 2 and 4 have results that fit into the range of the other three groups.

Average NFI by D A Ratio Quintiles

Copy of Average NFI by D A Ratio Quintiles

As the figures show, group one, the group with the highest debt-to-asset ratios tended to have the lowest net farm income. The other four groups tended to have NFI that was closer together which made it difficult to say that one group had higher net income than another. One reason why the highest leveraged farms had the lowest NFI may have been because these farms were also the smallest.

Figure 2 indicates that the highest leveraged farms did not see the big increase in NFI from 2007 until 2014 that the less leveraged farms did. However, the farms with very little debt didn’t see as much of an increase in NFI over this time period as did groups two, three, and four. Thus, it appears that farms with moderate debt were the ones to benefit the most from the higher grain prices of 2007 through 2014.

An important observation from Figure 2 is that the farms with very little debt had the least variability in net farm income. While these group five farms had the second lowest NFI from 2007 until 2014, these farms had the highest NFI in 2015 and 2016. Farms with the highest leverage, group 1, have been hit the hardest by the current downturn in the farm economy. However, during the peak of the 1980’s farm crisis, these group 1 farms were even in worse financial shape as there were 6 years in a row where their average NFI was below zero. The higher interest rates of the 1980’s were likely a factor contributing to these lower NFI for highly leveraged farms.

Net Farm Income for Kansas by Decile

 

 NFI by profitability decile

Figure 1. Net Farm Income by Decile for KFMA Grain Farms

 

 

Lower grain prices the last several years have helped to decrease net farm income for grain farms in the Kansas Farm Management Association. Net farm income for these farms is shown in the figure by deciles from 2002 through 2014. The deciles are calculated by ranking the farms in order by net farm income each year and then putting the top 10% of farms in the 1st decile, the second 10% of farms in the 2nd decile, etc. During the years from 2007 through 2012 when average net farm income was very strong, it was the upper 10% of farms that was really raising the average. For the most part, the largest percentage of farms in any given year earn from $0 to $100,000. 

As the figure indicates, the 9th decile usually breaks even while the bottom decile normally loses some money each year. Fortunately, the farm makeup of this bottom decile changes so that farms are not consistently in the bottom decile. The last two years have seen a dropoff in net farm income as grain prices have declined. The affect of these lower grain prices has probably had a more profound affect on the bottom 2 deciles. 

 

 

Bottom 2 deciles NFI

Figure 2. Net Farm Income for the Bottom 2 Deciles of KFMA Grain Farms

 

Figure 2 isolates how the bottom 2 deciles have been affected by lower grain prices. These two groups lost a considerable amount of money in 2014. The 9th decile, which normally earns very little net farm income but also normally loses very little net farm income, lost nearly $30,000. The bottom decile lost well over $150,000. Loses of these amounts will quickly put farms in a precarious financial position.  If these farms want to maintain their level of family living, the cash will need to come from a reduction in their equity, an increase in debt, or from some outside revenue. Obviously farms cannot lose this amount of income and hope to be viable operations very long.