1. Long-Run Trends in Profitability and Farm Size Michael Langemeier Dept. of Ag. Econ. Kansas State University

2. Introduction Three concerns revolving around current credit crisis –Financial Stress Negative Return on Equity High Debt to Asset Ratio –Divergence of Farm Performance –Government Bailout

3. First Concern Financial Stress Even with the strong financial performance of the last couple of years there are still a substantial number of farms with either a negative return on equity, a high debt to asset ratio, or both. Upcoming Slides –Current financial position –Vulnerabilities –Financial stress

4. Trends in Net Farm Income

5. Financial Efficiency Measures

6. Non-Irrigated Crop Enterprises

7. Cow-Calf Enterprise

8. Backgrounding Enterprise

9. Trends in Liquidity

11. Trends in Solvency

12. Potential Vulnerabilities in 2009 Input price increases Farmland value volatility Overall debt structure and solvency of some farm businesses Access of farm households to credit Off-farm income during a national recession –USDA-ERS, December 2008

13. Financial Stress The USDA-ERS defines vulnerable farms as those with a negative net farm income and a debt to asset ratio above 0.40. –U.S. Farms, 2007 3.5% of farms are vulnerable –KFMA Farms, 2007 6.8% of farms are vulnerable

14. Financial Stress Financial stress is often measured by examining farms with a negative return on equity and a debt to asset ratio above 0.70. KFMA Farms, 2003 to 2007 Averages –Negative Return on Equity = 40.33% –High Debt to Asset Ratio = 13.04% –Financially Stressed = 7.03%

15. Profit Margin Ratio

16. Financial Stress Measure AverageBenchmark Negative ROE40.33%0.37% High Debt13.04%7.41% Financial Stress7.03%0.37%

17. Financial Stress

18. Second Concern Divergence of Farm Performance Recent thesis by Lindsey Snider –KFMA Data Five-year snapshots from 1973 to 2007 Data sorted into deciles using value of farm production Variables –Total Acres –Economic Total Expense Ratio –Operating Profit Margin Ratio –Asset Turnover Ratio –Percent Income from Livestock Changes in economies of size

19. Total Acres

20. Economic Total Expense Ratio

21. Operating Profit Margin

22. Asset Turnover Ratio

23. Percent Income from Livestock

24. Economies of Size Five-Year Snapshots –1973 to 1977 –1978 to 1982 –1983 to 1987 –1988 to 1992 –1993 to 1997 –1998 to 2002 –2003 to 2007

32. Changes in Economies of Size

33. Third Concern Government Bailout What is the Real Cost of the Great Bailout of 2008-2009???

34. Possible Impacts Inflation Interest Rates Social Security and Medicare Economic Freedom –Government funds typically come with strings attached –Government dominated economies tend to have slower economic growth

35. Contact Information Michael Langemeier –mlange@agecon.ksu.edumlange@agecon.ksu.edu –Ag Manager Contributor site KFMA Newsletter Credit Crisis References