Farm & Ranch Financial Statement Analysis
Agricultural activities include livestock, fruit / orchard, grain (field crops), vegetables (row crops), nuts, dairy, storage elevators, feedlot, vineyards, nurseries, forestry, aquaculture, and other operations. The credit analysis of each operation presents some issues that are similar and some that are unique.
- What affects Farm / Ranch operations and profits?
- Commodity prices (sales income and in determining which crops to plant)
- Fertilizer prices
- Pesticide prices
- Seed prices
- Feed prices
- Equipment expense (purchase or leasing and maintenance)
- Gas, diesel, propane, natural gas and heating oil prices
- Seasonal labor costs
- Land values (agricultural operations whose solvency depends on continuously rising land values will have problems during a period of deflation)
- Transportation costs
- Weather, Drought / Flood
- Marketing expense
- Demands of operating within consolidated distribution systems and integrated supply chains
- Access to a broad range of reliable financial services
- Current Assets
- Cash: end of period cash, either in demand depost accounts (DDA) or Certificates of Deposit (less than one year in maturity). Cash held in escrow for land / real estate / equipment purchase is restricted and should be considered as readily available.
- Accounts Receivables (net of any charge-off)
- Marketable livestock
- Raised / finished crops and feed - may stored both on and off the farm / ranch property. Crops should be valued using the current market price, unless there is documented evidence that the farm / ranch has a firm, contracted price for the crops, in which case the contracted price normally must be used. The location, amount, and condition of all harvested or finished crops must be verified. Harvested or finished crops located off the farm / ranch property sometimes create the issue of legal rights of ownership and possession.
- Purchased commercial feed - in the bin and/or bagged
- Feeder livestock - livestock on the property ready to go. Livestock located off the farm / ranch property, at a third-party feed lot, or elsewhere, sometimes create the issue of legal rights of ownership and possession. Livestock values may fluctuate dramatically depending on factors such as the animal?s age, health, breed, sex, and reproductive capacity; and it is not uncommon for appraisers to have diverging values for the same animal or herd.
- Other current assets
- Long-term Assets
- Farm and ranch fixed assets / improvements - buildings, storage / equipment barns, finishing barns (swine), milking parlor (dairy), windmills, tanks, pens, fences, gates, sheds, outbuildings, and corrals.
- Land - fallow or presently under cultivation. There is no additional value allocated to land presently under cultivation as the crop may not be harvested in the future.
- Farm and ranch accessories - portable buildings, hunting blinds, game feeders, livestock feeders and troughs, irrigation equipment, fuel tanks, submersible, pumps, pressure tanks, portable corrals, gates, an chutes.
- Equipment - in the United States, value can be established through the Official Farm Equipment Guide Book published by Iron Guides.
- Chemical application
- Crop conditioning and storage
- Cultivators and weeding
- Grain and feed handing
- Harvesting - combines, forage harvesters, balers
- Light forestry
- Tractor(s) and tractor replacement parts
- Wagons and farm transportation
- Breeding livestock - may be further divided between purchased and raised.
- Investment in capital leases
- Contracts and notes receivable(s)
- Investment in Cooperative(s)
- Other Assets and Prepaid
- Current Liabilities
- Accounts Payable - suppliers, feed store, equipment repair
- Short-term Loans - most loans for the production of crops and for livestock feeder operations are intended to be self-liquidating at the end of the growing cycle from the proceeds of product sales. Therefore, the maturities of these loans should coincide with the production cycle for the product being financed, usually one year or less.
- Taxes Payable: Ad Valorem
- Long-term Liabilities
- Land acquisition mortgage
- Building construction loan
- Machinery and equipment acquisition loan - should be structured to ensure repayment / maturity within the useful life of the equipment.
- Breeding herd acquisition / development
- Orchard development
- Forest acquisition / development
- Carry-over Debt - restructured short-term debt, such as the unpaid portion of an annual operating line, resulting from the borrower?s inability to liquidate the debt as originally planned.
- Affiliate debt
- Taxes Payable: Deferred - due to the the difference between financial accounting and tax accounting, non-current capital assets with market values that exceed their cost will have a deferred tax liability on the difference.
- Shareholder's Equity
- Common share capital (if incorporated)
- Retained Earnings
- Crop Sales - Revenue(s) from crop cultivation is determined by multiplying the crop yield (or anticipated crop yield) per acre (bushels, tons, etc.) by the crop price (or anticipated crop price) received per unit (bushel, ton, etc.).
- Livestock / Feeder Livestock sales
- Livestock purchased for resale sales
- Breeding livestock sales
- Crop and Livestock product sales
- Agricultural program payments
- Crop insurance proceeds
- Cooperative distributions
- Rental income - derived from equipment rented out to neighboring farms / ranches.
- Off-farm / ranch income or non-farm salary - some farm / ranch family members work full-time jobs with non-agricultural employers. The family member must be a spouse, child or residing family member in order for the income to be considered as part of the total income of the operation. It is reasonable to consider this income as a farm / ranch, while a place of business, is also a residence. However, this source of is often devoted to family living expenses.
By forming cooperatives to purchase seed and chemicals, farmers can reduce the expense. Seed expense is determined by amount of seed planted per acre (seeds, pounds, bags) multiplied by the cost of seed per unit (seeds, pounds, bags); If a field has to be reseeded or late seeded thaen there may be more than one seed cost for the period.
- Chemical fertilizer
- Feed (commercial)
- Purchased market livestock
- Veterinarian services
- Crop insurance
- Labor / Compensation and Employee Expenses
- Real estate taxes
- Repairs, maintenance
- Storage, warehouse
- Equipment - repair and maintenance
- By group purchasing and sharing equipment, farmers can reduce the expense.
- Depreciation Expense
- Interest Expense
- Interest on land acquisition loan
- Interest on building construction loan
- Interest on property improvements
- Interest on equipment acquisition loan
- Primary residence - this mortgage may not be paid by the corporation but it must be considered among the total obligations.
- Transportation - freight, trucking
- Rent paid on additional land under cultivation
- Other Income
- Outside employment with entities unaffiliated with the farm or ranch.
- Gain (Loss) on sale of available land for sale.
- Gain (Loss) on sale of Fixed Assets (property and equipment).
- Other Expenses
- Usage of chemical fertilizer, herbicide, and pesticide is toxic, and misapplication can result in fines on the county, state and federal level, and related legal expense.
- Tax on income
- Net Income
- Revenues are calculated by:
- Determining the crop yield (or anticipated crop yield) per acre (bushels, tons, etc.).
- Determining the crop price (or anticipated crop price) received per unit (bushel, ton, etc.).
- Determining the anticipated net government program or subsidy payments received per acre.
- There are several several farm production methods:
- Double cropping - planting of two crops in one year, such as wheat / soybeans.
- Continuous cropping of one crop per year, such as a corn / soybean rotation.
- Ecofallow cropping of two crops every three years, such as a corn / wheat / fallow rotation.
- Fallow cropping of one crop every two years, such as wheat / fallow rotation.
Ratios for Examining Farm Operations
The calculation of these ratios provides some insight into the strength of the operations of the farm or ranch. By calculating the raios for the most recent fiscal period the credit analyst will obtain an analysis that provides an indication of the present condition of the farm or ranch. By calculating the ratios for several fiscal periods the credit analyst will obtain a trend analysis (comparison of past performance), and the direction of the trend is more important then the actual values. They are also used by the financial institution to make financial decisions with regard to extending credit to the farm or ranch, and are then utilized to monitor the performance of the farm or ranch by comparing them against the benchmark of a group similar sized operations (comparative analysis).
When determining the reason(s) behind a trend analysis it is important to ascertain whether the trend is related entirely to the operations of the individual farm or ranch, whether it is an industry-wide trend, or whether it is a regional or national economic trend.
Any and all ratio values must always be evaluated in the context of the other ratio values. No operation is ever going to be entirely perfect. In addition, farm and ranch operating ratios often reflect seasonal patterns.
Net Farm Income, plus interest earned, minus value of operator and family labor / Total Average Farm Assets owned.
Net Farm Income minus value of operator and family labor / Total Average Shareholder's Equity.
Average equity is determined by adding the previous period's equity figure with the present period's equity figure and then dividing by 2. Operator
Earnings Before Interest, Taxes and Depreciation (and Amortization). EBITDA is calculated by Net Farm Income, plus Interest Expense, plus Taxes, plus Depreciation (non-cash expense), plus Amortization.
Farm Cash Receipts, plus Change in product inventory (usually values for grain and livestock), plus Change in accounts receivable, plus Government payments, minus Livestock Purchases, minus Feed Purchases.
Gross Farm Income / Farm Business Assets
Liquidity is the ability of the farm or ranch operation to cover short-term expenses and debt payments.
Current Farm Assets / Current Farm Liabilities
Total Current Farm Assets - Total Current Farm Liabilities
Current Farm Liabilities / Total Farm Laibilities
Current Farm Assets, minus Inventory, Supplies, Crops in the field / Current Farm Liabilities
- This revises the Current Ratio by eliminating non-cash items, and tries to reduce the asset numerator to its most liquid componens. If these components could be liquified rapidly, and the ratio is 1.0x or higher, then the farm or ranch operation is liquid.
Solvency is the ability of the farm or ranch operation to cover long-term expenses and debt payments, and to pay off debt if all assets were liquidated for that purpose.
Debt to Assets (Solvency Ratio)
Total Farm Debt / Total Farm Assets
- Indicates how much of assets are funded by debt (when assets exceed the equity investment the operation is leveraged). The larger the ratio the greater the proportion of debt (debt per dollar of assets), and the less capacity for additional financing. In addition, the operation will have to produce sufficient income to service the interest and principal payment. The operation will also have periodic requirements to either satisfy or refinance the debt. New farm / ranch operations usually have a higher level of debt compared to farms / ranches in operation for several years. In the United States, this ratio has been declining: from a high of 15.6 in 1990 to 9.6 as of 2007. www.census.gov/compendia/statab/cats/agriculture.html
Equity to Assets
Total Farm Stockholder's Equity / Total Farm Assets
- Indicates how much of assets are funded by the owners investment (and retained earnings). If leased equipment is not included on the balance sheet then the ratio will be overstated.
Debt to Equity (Leverage Ratio)
Total Farm Debt / Total Farm Stockholder's Equity
- Another measure of leverage. In the United States, this ratio has been declining: from a high of 18.5 in 1990 to 11.6 as of 2007, and then increased again to 13.5 in 2009. www.census.gov/compendia/statab/cats/agriculture.html
Net Farm Income, plus Interest Expense / Interest Expense
- Measures the ability of net income before interest expense to service debt payment(s). Net income may include non-cash expenses such as depreciation (see EBITDA above).
Debt Payout (Debt Retirement)
Total Debt / Annual Net Farm Income
- Indicates how many years it would take for the farm or ranch operation to pay off existing debt it net income remained level.