Many farms in South Dakota built working capital and financial reserves between 2009 and 2012, a recent period of relatively high returns. Since 2013 the strong working capital position has been on a downward trend. Figure 1 shows average working capital positon per acre of farms enrolled in South Dakota Center for Farm and Ranch Management (SDCFRM) program.
Working capital is calculated as current assets minus current liabilities. Positive values indicate that current assets exceed current liabilities and resources are accessible to meet current obligations. Higher values are desired to take advantage of opportunities and provide security when profitability decreases.
Figure 1. Working capital per acre, average of all farms enrolled in SDCFRM. Sources: SDCFRM Mitchell Technical Institute, SDSU Extension.
Recent Working Capital Trends
Working capital increased $346 per acre from 2009 to 2012 and peaked at $505 per acre. At the end of 2015 however, working capital had decreased to $223 per acre. The increase in costs from 2009 to 2012 required an increasing amount of working capital. Commodity prices have decreased from 2010-12 peaks. Lower commodity prices and a slow reduction in costs may lead to low or negative cash flows for the next couple years.
In 2015, working capital stayed steady at $223 per acre. Farms with a larger percentage of cash rent acres at high rent levels may see larger reductions in working capital in 2016. If 2016 losses are large, farmers could see working capital move to a marginal level. Vulnerable farms may see operating credit severely restricted such that 2017 production will not be possible without substantial cuts in direct costs and in cash rents.
Working Capital Estimates
- Expected yields of 150 bushels for corn and 40 bushels for soybeans. Individual yields will vary considerably, with low yields possibly triggering crop insurance payments.
- $2.70 corn and $8.80 soybeans, Table 1; $3.80 corn and $10.20 soybeans, Table 2; Individual’s price levels will vary considerably.
- Costs come from SDSU Extension 2016 crop budgets. Individual costs of production will vary.
- Cash rent for central South Dakota during 2015 was on average $118 (South Dakota Agricultural Land Market Trends). The survey cash rent ranges from $79 to $175 per acre. Individual cash rents will vary considerably.
- Working capital changes are estimated using the average of all farms from the SDCFRM Annual Report. Including debt payments, depreciation, capital purchases, and withdrawals.
The price and cost estimates used in Table 1 result in a per acre decrease of working capital at -$22 owned land, -$85 cash rent, and -$65 share rent.
The price scenario used in Table 2 results in an increase in working capital per acre of $89 owned land, $26 cash rent, and $18 share rent.
The Bottom Line
Actual and individual results will vary from these estimates. The cash flow estimates and the current price and profit margin outlook for 2016 and 2017 indicate the continued need to cut costs. The tables show working capital calculations and are used to demonstrate areas to increase cash flow.
- Know your numbers. Be proactive and analyze every aspect of the farm business. Keep your margins in balance. Understand what is making you money and what is not necessary for your business. Compare your financial ratios and expenses with peers such as those enrolled in the SDCFRM program.
- Price risk protection. Market on your margins, locking in profits when available.
- Adapt conservation practices. The Conservation Stewardship Program through the Natural Resource Conservation Service provides payments to be good stewards of the land.
- Reduce direct costs. Use management skills to reduce costs without sacrificing yields. Spend management time on top direct costs, fertilizer management, and seed costs.
- Cash rent. Estimates use a cash rent of $118 (Table 1 & Table 2) for central South Dakota. The 2016 average is $115. It is likely that continuing cash rent reductions are needed. In cases where cash rents are significantly above average, the decision will have to be made whether to continue to farm land with high cash rents. It may not be prudent to continue sustaining losses on high cash rent farms. These rental choices will be very challenging.
- Capital purchases. The estimates have capital purchases at $55 per acre (Tables 1 & Table 2) above the current depreciation levels of $40 per acre. Producers may be able to lower capital purchases which will reduce the drain on working capital.
- Non-farm cash flows. Non-farm cash flows include a positive $15 per acre of other income, an outflow of $43 per acre for withdraws, and a $6 an acre outflow for taxes; resulting in a $34 per acre outflow for non-farm cash flows. It is important for farmers to manage their time resourcefully.
Table 1. Per acre Estimates of Working Capital Changes for Owned and Cash rent Farmland in Central and East Mid Production South Dakota.
Table 2. Per acre Estimates of Working Capital Changes for Owned and Cash Rent Farmland in Central and East Mid Production South Dakota.
- Davis, J., S. Sand. South Dakota Agricultural Land Market Trends, 1991 – 2016: Results from the 2016 SDSU South Dakota Farm Real Estate Survey Department of Economics
- South Dakota Center for Farm/Ranch Management 2015 South Dakota Annual Report, Mitchell Technical Institute Farm Business Management Program.
- SDSU Extension 2016 Crop Budgets
- Schnitkey, G., N. Paulson, J. Coppess, and C. Zulauf. “2015 Estimated ARC-CO Payments." farmdoc daily (6):101, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, May 27, 2016.
- Schnitkey, G. “Working Capital Changes Projected for Grain Farms in 2016: Before and After Recent Price Changes." farmdoc daily (6):117, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, June 21, 2016.