Dr. Allen Featherstone Discusses Farm Economy

(Dr. Allen Featherstone) Last year, in 2014, about $120,000 net farm income, and then, in 2015, it dropped to about $4,500 using Kansas numbers. What we’ve been able to do here is we’ve been able to look a little bit more in-depth with regards to some of the changes that are going on with those farms and in terms of looking at repayment capacity, debt-to-asset ratios, working capital, just to get a feel for what some of the adjustments did occur, or some of the adjustments that farmers may be able to make going forward. Basically, what we’re looking at repayment capacity is we take all of the income that’s generated on the farm, and non-farm income, we end up subtracting all of the expenses. Then we end up looking at what is needed to pay off principal in debt. Essentially, that gives us a repayment capacity ratio. If you would go back to 2005 and, essentially, the 20 years previous to that, we were running a debt-to-asset ratio about 30 to 35. The 24% that we have now is historically low. The last two years in Kansas, we’ve actually seen a decrease in land values. In 2015 we saw a decrease of about a half a percent. If you look at 2016, we’ve actually seen a drop of about seven and a half percent. They end up making up about 75% of a farmer’s balance sheet, and so in some respects what happens to land values is going to be pretty critical in terms of just where those debt-to-asset ratios go. One of the things I think is fairly important to realize, and again a pretty positive take-away, is that even if land values would decline by 30%, the debt-to-asset ratio would only go up to about 27%. If just land values would fall by themselves, we still are in a good leverage position. Probably what’s most disconcerting, or most things to think about is that if asset values are falling, what is happening to the debt, for example, will farms be accumulating debt. We can, essentially, deal with a decline in asset values as long as there is the cash necessary to keep us in a relatively decent position with regards to the amount of borrowing going on in the sector. Some of those increased expenditures during the good times might be able to be rolled back a little bit to provide more cash to make sure that the farmers prepared for a couple difficult years.

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