Financial Structure of Farms

What is a Farm? Definitions of a farm – > $1,000 in sales – > 10 acres – > 1 acre About 2 million “farms” in the U. S. – Many are small farms or “Hobby Farms” Beginning farmers Retiring farmers Limited resource farmers

Enormous Differences in Farms Differences in size – Small end -- $1,000 in sales, “Hobby Farms” – Middle size – Represented by data from Kansas Farm Management Association – Large size-- 000’s of acres, many employees, many profit centers for the business

Enormous Differences in Farms Enterprise mix – Expansive dry land crop (Western Kansas) – Irrigated crop – Highly productive Corn/Soybean country – Specialty crops—vegetables, fruits, etc. – Livestock Confinement hog operations Ranches—over many acres Feedlot

Enormous Differences in Farms Philosophy behind operation – Farm is a business – Farm is a way of life

Enormous Differences in Farms Most are sole proprietorships Some partnerships Some corporations

Conclusion Because farms are so different, work for a farm must be highly individualized—has to be a specific plan designed for a specific farm

Financial Management Several financial management models in use – Checkbook model—Business is okay as long as there are more checks in the checkbook – Credit card model—Business is okay as long as the credit cards work (can get operating loans) – Billfold model—Business is okay as long as there is cash in the billfold—sell more products when need the money

Financial Management Cash Basis recordkeeping—keep track of cash expenses, cash receipts, and depreciation – Farms (sole proprietorships) are allowed to pay taxes on cash basis – Much lending occurs based on income tax forms – Need several years of income tax forms to get a clear picture of the business profitability May be selling business to generate cash, and not be profitable at all Inventory adjustments are not captured, so inventory changes may be masking business problems

Financial Management Accrual basis for accounting Used by Kansas Farm Management Associations Captures cash income and expenses, depreciation, and inventory changes Calculates “Net Farm Income” which is a return to equity, unpaid labor and management

Financial Planning GOALS provide foundation for financial planning Then determine “where the business is”— develop a Net Worth Statement Then develop an Income Statement—is income being generated such that you can get to your goals Then develop a cash flow budget—will the operation cash flow for the plan developed?

Conclusion Financial planning must be individualized – Enormous differences between farms in size, type and financial performance Basically a Financial “Agricultural Work Site Assessment”

“Average Farm” in KFMA 1,900 total acres (1,300 crop acres) Total Assets of $1.2 million ($330,000 debt) 1.4 workers including one operator Gross livestock income of $70,000 Value of farm production of $300,000 Total Farm Expense of $250,000 Net Farm Income of $50,000 Family Living Expenses of $50,000

Accrual Net Farm Income

Net Farm Income By Group

Profit Margin in Farming

Family Living Expenses

Conclusions Margins on average are very small – Cash returns are not large enough, in general, to pay for the investment – A considerable portion of the return in agriculture is “increases in land values” – “Best” producers do substantially better than “worst” producers (huge range) Many years Net Farm Income does not cover Family Living Expenses

Profitability of Cowherd

Profitability of Beef Backgrounding

Profitability of Hog Production

Conclusion Great deal of risk in production agriculture – Makes planning very hard – Need to evaluate a range of outcomes when making a decision

Market Structure in Production Ag Producers are “price takers” rather than “price makers” Different than many industry structures Many relatively small (compared to the size of the whole market) producers

Economic Principle Gross returns and total economic expenses tend to be pulled together over time in production agriculture Result is no “Economic profit” in the long run in theory Bottom line is that new investments just barely pay (at best) in many circumstances – Total of cash return and appreciation needed to cover investment cost in land, for example – “Profits” get bid into land values if/when they occur

Producers must cope with great risk Extreme variability in prices for products, costs of inputs, and production (yields) Rule of thumb: imagine the worst and if that is okay, go with it Risk encourages a tendency to cut costs – Dollar saved is a dollar in the pocket – Dollar invested may or may not earn much

Investments in producer enhancements How does it fit with Goals of operation? What is the return on the investment? Low margins in general Tendency to emphasize cost reduction Tax implications (only make investment a little cheaper) – May be deductible – May be depreciable

What to do when a disability occurs? Need to consider a really broad range of options Difficult to dream up all the possibilities Need to think as innovatively as possible

Many Options in Production Ag Land market—rent the land to another operator Custom hire for machinery operations Harvest Planting Spraying Services provided by Coops Minimum tillage options Grow a garden and go fishing!

Many Strategies for Agricultural Producers Commodity strategies – Oriented toward expansion – Oriented toward being low cost producer Innovative strategies – Develop unique product – Niche oriented markets

Sources of Help Services for Producers – Farm Analyst Program – Kansas Farm Management Associations Educational Programs – Masters of Agribusiness (MAB) Program at Kansas State University – Management and Strategic Thinking (MAST) Program offered by Extension Faculty – AgManager.Info is the department Web site

Farm Analyst Program

Role of Farm Analyst Duane Hund - farm analyst for the Department of Agricultural Economics and coordinator of the program -serves the needs of families referred from the Kansas Agricultural Mediation Service -uses Finpack software program to help families develop strategies to improve their profitability -has worked with over 800 Kansas farm families in the past 23 years

Farm Analyst Team Members Duane Hund, Paxico Coy Allen, Wichita Fred Armstrong, Lakin LaVell Winsor, Grantville

A comprehensive whole farm financial planning and analysis system

FINAN Annual Financial Analysis FINLRB Financial Long Range Planning FINFLO Monthly Cash Flow Planning Annual Plan Annual Cash Flow Planning FINPACK Components

Kansas Farm Management Association Program

 Over 2,300 farm operations representing over 3,000 farm families  Valuable analysis databank Over 1,550 farms for 2006  20 Extension Agricultural Economists in six associations Kansas Farm Management Association Program

Kansas Farm Management Association Vision/Mission...  Deliver educational programs and technical information  Integrated research, analysis and education  Improved economic choices and management decisions of individuals, families, farms

 Develop a sound farm accounting system  Whole-farm and enterprise analysis  Comparative and trend analysis  Integrate tax planning, marketing and asset investment strategies  Assistance in understanding financial information for making decisions Kansas Farm Management Association Program

KAMS Mediator Training Kansas Farm Management Association Program

For More Information  Kansas Farm Management Association (KFMA)  Extension Agricultural Economics Kevin L. HerbelOffice: Waters HallCell: Manhattan, KS

K-State Master of Agribusiness A Decade of Developing Agribusiness Leaders 

Distance education with a twist Professional master’s degree in business and economics that focuses on food and agribusiness management 2 ½ year program – 2 years of coursework – Last 6 months developing professional thesis Delivered executive-style to working professionals through – Internet – CD-Rom & DVD – Pod-Casting – Multi-audio chat system – On-campus sessions KANSAS STATE UNIVERSITY MASTER OF AGRIBUSINESS

Who is an MAB student? Technical background in food discipline and want to gain business and economic skills Business or liberal arts background, entered a career in food or agribusiness and need to better understand the industry Entered a management role and need to broaden their managerial skills Wish to update their technology skills KANSAS STATE UNIVERSITY MASTER OF AGRIBUSINESS

Who is an MAB student? Students and alumni from more than 35 states and 20 countries abroad Employed in all sectors of the food and agriculture industry More than 100 graduates KANSAS STATE UNIVERSITY MASTER OF AGRIBUSINESS

MAST Management, Analysis & Strategic Thinking Kevin C. Dhuyvetter Terry L. Kastens Alicia Goheen Department of Agricultural Economics Kansas State University

What is MAST? Innovative farm and risk management educational program combining face-to-face workshops with distance learning Offers depth not available in typical one- to two-day programs On-campus sessions and distance modules

The MAST Target Audience – Progressive farm managers – Agricultural professionals supporting agriculture Lenders Agricultural agents Farm managers Accountants

How MAST Works Components – On-campus sessions – Distance learning modules PowerPoint presentations Tegrity lectures – Chat sessions – Message boards – s – Phone calls

Contact Information for MAST Contact Alicia Goheen at Visit the Agricultural Economics Web site: AgManager.info

Questions?