Econ 339X, Spring 2011 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor John Lawrence Professor

Econ 339X, Spring 2011 Today’s Topic Farm Financials

Econ 339X, Spring 2011 Financial Terms Cash Flow – The difference between cash revenues and expenses moving through the business Net Worth – Value of assets versus liabilities in the business Income – The difference between total revenues and expenses moving through the business

Econ 339X, Spring 2011 Cash Flow Costs Cash Flow Costs: the cash expenses paid to produce and market the crop Land ownership structure affects cash flow costs Renter, owner, crop-share Managerial decisions also affect cash flow costs Crop insurance Fertilizer Etc.

Econ 339X, Spring 2011 Outlining Cash Flow Needs What are your cash inflows? Source: Edwards,

Econ 339X, Spring 2011 Outlining Cash Flow Needs Source: Edwards,

Econ 339X, Spring 2011 Outlining Cash Flow Needs Source: Edwards, Monitoring cash needs within and through the year A positive cash flow for the year does not imply the farm can not get caught in a cash flow squeeze

Econ 339X, Spring 2011 Current Assets and Liabilities Source: Edwards, Current assets – cash or assets that can be converted to cash quickly Current liabilities – debts that are due in a short time

Econ 339X, Spring 2011 Fixed Assets and Liabilities Source: Edwards, Fixed assets – assets that will not be sold and are needed to maintain production Fixed liabilities – debts that are due in a long time

Econ 339X, Spring 2011 Farm Net Worth Source: Edwards, Farm Net Worth = Farm Asset Value – Farm Liabilities Working capital = Current Assets – Current Liabilities  Potential cash to cover additional expenses

Econ 339X, Spring 2011 Key Ratios Source: Edwards, Current Ratio = Current Assets/Current Liabilities  Measures ability to pay debts in the short term  Ratio of 2 or higher indicates good ability  Ratio of 1 or lower indicates possible issues Debt-to-Asset Ratio = Total Liabilities/Total Assets  Measures credit load versus asset value  30% to 40% is a common value for Iowa farms  Farming can be an expensive livelihood and loans often provide the means of conducting it

Econ 339X, Spring 2011 Iowa Averages, Source: Edwards,

Econ 339X, Spring 2011 Iowa Averages, Source: Edwards,

Econ 339X, Spring 2011 Iowa Corn Prices vs. Costs Source: USDA-NASS and Duffy and Smith,

Econ 339X, Spring 2011 Knowing Your Farm Financials …Provides you several targets for your marketings Do prices cover your cash expenses, meeting your cash flow needs? Do prices cover your total expenses, providing profit and adding to your net worth? On the production side, we often compare yields to trend; on the marketing side, we need to compare prices to per-unit costs.

Econ 339X, Spring 2011 Class web site: Spring2011/