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Agribusiness & Applied Economics Report No. 608 August 2007 Financial Characteristics of North Dakota Farms 2005-2006 Andrew L. Swenson Department of Agribusiness and Applied Economics Agricultural Experiment Station North Dakota State University Fargo, ND 58105-5636

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Page 1: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

Agribusiness & Applied Economics Report No. 608 August 2007

Financial Characteristics ofNorth Dakota Farms

2005-2006

Andrew L. Swenson

Department of Agribusiness and Applied Economics Agricultural Experiment StationNorth Dakota State University

Fargo, ND 58105-5636

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CONTACT INFORMATION

We would be happy to provide a single copy of this publication free of charge. You canaddress your inquiry to: Department of Agribusiness and Applied Economics, North DakotaState University, P.O. Box 5636, Fargo, ND, 58105-5636, Ph. 701-231-7441, Fax 701-231-7400,e-mail [email protected]. This publication is also available electronically at this website: http://agecon.lib.umn.edu/.

NDSU is an equal opportunity institution.

NOTICE:

The analyses and views reported in this paper are those of the author(s). They are not necessarilyendorsed by the Department of Agribusiness and Applied Economics or by North Dakota StateUniversity.

North Dakota State University is committed to the policy that all persons shall have equal accessto its programs, and employment without regard to race, color, creed, religion, national origin, sex, age,marital status, disability, public assistance status, veteran status, or sexual orientation.

Information on other titles in this series may be obtained from: Department of Agribusiness andApplied Economics, North Dakota State University, P.O. Box 5636, Fargo, ND 58105. Telephone: 701-231-7441, Fax: 701-231-7400, or e-mail: [email protected].

Copyright© 2007 by Swenson. All rights reserved. Readers may make verbatim copies of thisdocument for non-commercial purposes by any means, provided this copyright notice appears on all suchcopies.

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TABLE OF CONTENTS

List of Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii

List of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

Abstract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Source of Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Interpretation of Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Farm Classifications and Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

All Farms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Farm Enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Farm Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Farm Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Cropland Tenure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Net Farm Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Debt-to-Asset Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Farmer Age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Appendix: Definition of Financial Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

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ii

LIST OF TABLES

Table 1. Median farm size, farm operator age, and financial factors of farms participatingin the North Dakota Farm Business Management Education Program, 1997-2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Table 2. Farm classifications and percent distribution of farm types within regions, North DakotaFarm Business Management Education Program, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Table 3. Current assets and current liabilities, quartile values for 2006, median values for2005, and 5-year average, 2001-2005, of median values, North Dakota FarmBusiness Management Education program participants. . . . . . . . . . . . . . . . . . . . . . . . . . 18

Table 4. Liquidity measures, quartile values for 2006, median values for 2005, and 5-yearaverage, 2001-2005, of median values, North Dakota Farm BusinessManagement Education Program participants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Table 5. Total assets and total liabilities, quartile values for 2006, median values for 2005,and 5-year average, 2001-2005, of median values, North Dakota Farm BusinessManagement Education Program participants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Table 6. Solvency measures, quartile values for 2006, median values for 2005, and 5-yearaverage, 2001-2005, of median values, North Dakota Farm BusinessManagement Education Program participants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Table 7. Rate of return on assets and rate of return on equity profitability measures,quartile values for 2006, median values for 2005, and 5-year average, 2001-2005,of median values, North Dakota Farm Business Management Education programparticipants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Table 8. Operating profit margin and net farm income profitability measures, quartilevalues for 2006, median values for 2005, and 5-year average, 2001-2005, ofmedian values, North Dakota Farm Business Management Education Programparticipants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Table 9. Repayment capacity measures, quartile values for 2006, median values for 2005,and 5-year average, 2001-2005, of median values, North Dakota Farm BusinessManagement Education Program participants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Table 10. Asset turnover, and operating expense and depreciation expense efficiencymeasures (as a percentage of gross farm income), quartile values for 2006,median values for 2005, and 5-year average, 2001-2005, of median values, NorthDakota Farm Business Management Education Program participants. . . . . . . . . . . . . . . 25

Table 11. Interest expense and farm income efficiency measures (as a percentage of grossfarm income), quartile values for 2006, median values for 2005, and 5-yearaverage, 2001-2005, of median values, North Dakota Farm BusinessManagement Education Program participants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

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iii

LIST OF FIGURES

Figure 1. Median total farm assets and liabilities by farm type, 2006, N.D. Farm Mgt Program . . . . . 8

Figure 2. Median net farm income by farm type, 1997-2006, N.D. Farm Mgt Program . . . . . . . . . . . . 8

Figure 3. Median rate of return on assets by farm type, 1997-2006, N.D. Farm Mgt Program . . . . . . . 8

Figure 4. Median asset turnover ratio by farm type, 1997-2006, N.D. Farm Mgt Program . . . . . . . . . 8

Figure 5. Median total farm assets and liabilities by farm sales, 2006, N.D. Farm Mgt Program . . . . 10

Figure 6. Median net farm income by farm sales, 1997-2006, N.D. Farm Mgt Program . . . . . . . . . . 10

Figure 7. Median term debt coverage ratio by farm sales, 1997-2006, N.D. Farm Mgt Program . . . . 10

Figure 8. Median interest expense as a percent of gross revenue, by farm sales, 1997-2006, N.D. Farm Mgt Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Figure 9. Median net farm income by crop land tenure, 1997-2006, N.D. Farm Mgt Program . . . . . 13

Figure 10. Median asset turnover ratio by crop land tenure, 1997-2006, N.D. Farm Mgt Program . . . 13

Figure 11. Median net farm income by debt-to-asset group, 1997-2006, N.D. Farm Mgt Program . . . 13

Figure 12. Median net farm income as a percent of gross revenue by debt-to-asset group, 1997-2006,N.D. Farm Mgt Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Figure 13. Median total farm assets and liabilities by farmer age, 2006, N.D. Farm Mgt Program . . . 17

Figure 14. Median net farm income by farmer age, 1997-2006, N.D. Farm Mgt Program . . . . . . . . . . 17

Figure 15. Median term debt coverage ratio by farmer age, 1997-2006, N.D. Farm Mgt Program . . . 17

Figure 16. Median net farm income as a percent of gross revenue, by farmer age, 1997-2006, N.D. Farm Mgt Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

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iv

Abstract

The performance of over 500 North Dakota farms, 2005-2006, is summarized using 16 financial measures.Farms are categorized by geographic region, farm type, farm size, gross cash sales, farm tenure, net farmincome, debt-to-asset, and age of farmer to analyze relationships between financial performance and farmcharacteristics. Five-year averages, 2001-2005, and farm financial trends for the 1997-2006 period are alsopresented. In 2006, median and average acreage per farm was 1,966 and 2,386, respectively. Median andaverage cash farm revenue was $281,751 and $361,418, respectively.

Financial performance is volatile. Year-to-year changes in median net farm income within regions andfarm types averaged 50 percent from 1997 to 2006. Median net farm income in 2006 was the lowest infive years, $35,980, and ranged from $83,970 in the Red River Valley to only $689 in the west regionwhich was the lowest for any region over the 1997-2006 period. In 1999, 2000, 2003 and 2004 the rate ofreturn on equity exceeded the rate of return on assets, which indicates that debt capital was employedprofitably. Interest expense as a percent of gross revenue improved from 1997-2004, but increased in2005 and 2006 because of higher debt and interest rates.

The Red River Valley and crop farms had stronger profitability, solvency and repayment capacity from1997 to 2006 than other regions and farm types, respectively, except in 2005 when the south centralregion and livestock farms had better performance. Farms with sales less than $100,000 were over twiceas likely to have debt-to-asset higher than 70 percent than were farms with sales greater than $500,000.Farms that own some crop land, but less than 40 percent are more likely to be crop farms, farm moreacreage, have larger sales, and be more profitable. As expected, solvency and percent of crop land ownedincreased with farmer age.

Keywords: Farm financial management, farm management, farm income, liquidity, solvency,profitability, repayment capacity, financial efficiency, financial benchmarks, tenure, North Dakota.

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1

INTRODUCTION

Financial statements such as the balance sheetand income statement provide a structured formatto summarize financial information so it is moremanageable for decision making. It is helpful tofurther simplify or summarize informationcontained in financial statements into keymeasures of financial performance. However, thecalculation of a financial measure can be fruitlessunless there is a meaningful basis of comparisonto evaluate the number. Two methods ofcomparison are:

Ø Past performance. The progress of a businesscan be monitored by constructing financialmeasures on a periodic basis and comparingpresent to past performance.

Ù Industry benchmarks. The average ormedian of a financial measure from severalsimilar businesses provides a good point ofreference. There are statewide farm recordprograms in some states, including NorthDakota. Each farm has its own unique aspects,so the most appropriate comparison would befarms that have similar enterprises andresources.

Whatever method of comparison is used, it isimperative that the procedures for construction offinancial statements and performance measuresare consistent over time and between farms toensure an "apples-to-apples" comparison.

The Farm Financial Standards Task Force(FFSTF), which was formed by the AmericanBankers Association in 1989, has providedrecommendations of standards for financialstatement construction and the calculation of 16measures of financial performance. Theserecommendations were adopted, in most part, bythe North Dakota Farm Business ManagementEducation Program and are the basis for thebenchmarks presented in this publication. TheAppendix has an explanation of the financialmeasures used in this study.

The purpose of this study is to provideinformation to producers, lenders, educators, andothers on the financial performance of a sampleof North Dakota farms. Table 1 lists the medianoperator age, farm size and selected financialfactors, 1997-2006. The data are from financial

summaries of farms participating in the NorthDakota Farm Business Management Educationprogram. In this study the median and upper andlower quartiles of 16 financial performancemeasures are presented for all farms in the dataset and for groupings of farms by characteristicsuch as farm type, farm size, and age of producer.The results can be used by producers and lendersto evaluate the financial performance of a farm.Also, trends can be identified and relationshipsbetween farm characteristics and financialmeasures can be analyzed. However, because ofthe small number of farms in this study, theresults should be used cautiously and only beconsidered guidelines.

SOURCE OF DATA

About 700 farms are enrolled in the NorthDakota Farm Business Management Educationprogram. Instructors educate and assist producersin record keeping and review data forcompleteness and accuracy. Instructors use theFinpack farm financial management softwareprogram to generate financial summaries. From1997-2006, the financial summaries of over 500farms each year were considered usable for thisstudy.

About 85 percent of the same farms are in thestudy from one year to the next. Annual turnoveroccurs from changes in farm managementprogram enrollment and the level of farmscompleting their records by a cutoff date.

The farms in this study are larger and the age ofthe farm operators younger than the stateaverage. In 2006, there were 30,300 farms inNorth Dakota with agricultural production of atleast $1,000. Only 9,800, or 32%, had grossreceipts greater than $100,000, whereas 87% ofthe 509 farms in this study exceed that salesvolume (median gross sales was $281,751). Thefarms in the study are more representative ofoperations that provide the primary source of netfamily income. The average age of farmoperators in this study is 45 compared to 54 forthe state average.

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2

INTERPRETATION OF RESULTS

Each financial measure was calculated for eachfarm. Refer to the Appendix for definitions ofthe financial measures and an explanation ofasset valuation and accrual adjustments.

Farms were grouped by characteristics such asregion, type of farm, and size and were sorted inorder from strongest to weakest by each of the 16financial measures. The median is the midpointvalue of the financial measure: one-half of thefarms in the category had a higher value andone-half had a lower value than the median. Theupper quartile is the value that was exceededby one-fourth of the farms, and the lowerquartile is the value that was exceeded bythree-fourths of the farms. (Another definition oflower quartile is the value for which one-quarterof the farms in the category had a weaker value.)

Individual farm operators and lenders can use thisstudy for benchmarks of comparison if theirfinancial measures are calculated similarly. Forexample, a farm operator 30 years of age maycompare his/her profitability and financialefficiency with those of other young operators.Or, a lender may compare the solvency andrepayment capacity of producers who rent alltheir crop land. This study also can be used tolook at relationships and trends. What is therelationship between age of farmer and rate ofreturn on equity? How has operating profitmargin of livestock farms changed over time?

One ratio is not sufficient to make conclusionsabout the overall financial performance of a farmbusiness. For example, a crop farm may have adebt-to-asset ratio of 60%, which is worse thanthe median value of 56.3% (shown on table 7) forthe crop farm enterprise category. However,other factors such as profitability, total assets,and age of operator should also be considered.

Also, a farm can be adversely affected byextraordinary circumstances. Profitability in thelow quartile may not be reflective of managementcapability if the farm had localized bad weatherthat was not experienced by many otherproducers in the farm category.

Caution must be used when analyzing the tablesbecause a small number of farms increases thepossibility that results may not be representativeof a farm category. In this study, for 2006, thereare only 65 farms with sales less than $100,000,80 mixed livestock-crop enterprise farms, and 82farms in the west region. Performance of the RedRiver Valley region may not be representative ofthe central or northern areas of the Red RiverValley because nearly all valley farms in thestudy are from the south. Also, since 2003 therewas a lack of farms in the northern portion of thewest region. Lastly, the livestock farm type isdominated by the beef cow-calf enterprise.

There are some strong correlations between twoor more classifications, so it is difficult toassociate a financial measure with an individualfarm characteristic.

For example, the profitability of livestock, incomparison to crop farming, is reflected in farmcategories that had a disproportionate number oflivestock farms, such as the west region, farmswith greater than 40% crop land ownership, andfarms with less than $100,000 sales. Also,comparison of farms by enterprise type, farm sizeand gross sales can be affected by regionalperformance. The Red River Valley has thehighest proportion, relative to other regions, ofcrop farms, farms of less than 2,000 acres, andfarms with gross income greater than $500,000.

Table 1 shows the 10-year trends in financialperformance and farm characteristics. Table 2lists the farm characteristics and percentagedistribution for 2006 and the breakout of thesecharacteristics by region of North Dakota. Tables3 through 11 display the median and quartiles of16 financial measures by farm characteristics.Figures 1 through 16 display relationshipsbetween selected farm characteristics andfinancial measures. A summary of highlights byfarm characteristics is also presented.

Page 9: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

3

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4

FARM CLASSIFICATION AND HIGHLIGHTS

ALL FARMS

Highlights

C Some consistent trends over the past ten years, 1997-2006, for farms enrolled in the North Dakota FarmBusiness Management Education Program are:– farms are getting larger as measured by median gross revenue which increased 57%, and by median

farm assets and liabilities, which increased 42% and 32%, to $688,802 and $348,102, respectively.– farmers are getting older; the median age increased from 42 to 46.– average off-farm wages and salaries per farm household increased by two-thirds.

C Overall financial performance in 2006 was the lowest in the past five years. Median net farm income was$35,980. Good crop prices and record sugarbeet yields were not enough to offset historically high inputcosts and severe drought in the west and portions of central North Dakota.

C Financial performance, 1997-2006, was poorest in 1997 followed by 1998 because of low cattle prices,weather related production problems with small grains in 1997, low crop prices in 1998 and increasingproduction costs. Financial performance was strong in 1999 and 2000, despite very low crop prices,because of extraordinary government and crop insurance payments and higher beef prices. Also, at thetime, yields and acreage of corn, soybeans and sugarbeets were at record levels. Profit declined in 2001because of lower government subsidies and higher crop production costs with continued low commodityprices.

C Profit increased 37% in 2002 from high prices and lower production costs. Median net farm incomereached a 10-year high in 2003 at $49,181. A good wheat and barley crop, strong crop prices andlivestock profit, and disaster aid legislated in 2003, for crop losses that occurred in 2001 and 2002, allcontributed. Financial performance in 2004 was strong albeit down from 2003. High costs and poor rowcrop yields were offset by crop insurance, very high spring wheat, canola and field pea yields and verystrong beef cow-calf profit and flax prices. Profit declined in 2005 despite record corn, soybean,sunflower, and flax yields and high cattle prices. Input costs were high and portions of the state,particularly the northeast, had production problems

C Median current ratio has been relatively stable, ranging between 1.2 to 1.4 from 1997 to 2006. In 2006,the median debt-to-asset ratio, 57.5%, was the worst since 1998.

C Median rates of return on equity and assets were 4.7% and 2.4%, respectively, in 2006. In the 1997-2006period, the years that ROE exceeded ROA, which indicated that debt capital was employed profitably,were 1999, 2000, 2003, and 2004.

C Median term debt coverage ratio dropped to 1.2 in 2006 compared to the ten year high of 1.6 in 2003.

Only in 1997 and 1998 was median term debt coverage ratio below 1.0, which indicates over one-half ofthe farms were not able to make all scheduled term debt payments with farm and non-farm income.

C Interest expense as a percent gross revenue declined from 1997 to 2004 but then increased in 2006 and2005, to 7.2% and 6.0%, respectively, because of higher debt and interest rates.

C Median net farm income as a percent of gross revenue was 14.2% in 2006 and 16% in 2005. In the 1997-2006 period it was the highest, 22.4%, in 1999 and lowest, 8.1%, in 1997.

Page 11: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

5

TABLE 2. FARM CLASSIFICATIONS AND PERCENT DISTRIBUTION OF FARM TYPES WITHIN REGIONS, NORTHDAKOTA FARM BUSINESS MANAGEMENT EDUCATION PROGRAM, 2006.

Farm Group Category Breakout by Region

Farm Group CategoryNumber of

Farms (509) PercentageRed River

ValleyNorth

CentralSouth

Central West

Region 97 177 153 82

Red River Valley 97 19.1

North Central 177 34.8

South Central 153 30.1

West 82 16.1

Farm Enterprise -----------------------percentage----------------------

Crop 335 65.8 99.0 74.0 60.1 19.5

Livestock 94 18.5 0.0 13.6 20.9 46.3

Mixed 80 15.7 1.0 12.4 19.0 34.1

Farm Sales

$99,999 or less 65 12.8 11.3 10.7 11.1 22.0

$100,000 - $249,999 160 31.4 18.6 35.0 32.7 36.6

$250,000 - $499,999 176 34.6 29.9 40.7 34.6 26.8

$500,000 or more 108 21.2 40.2 13.6 21.6 14.6

Farm Size

1,999 acres or less 258 50.7 77.3 41.2 54.2 32.9

2,000 acres or more 251 49.3 22.7 58.8 45.8 67.1

Cropland Tenure

Full tenant 102 20.0 27.8 13.6 21.1 23.8

1-20 percent owned 129 25.3 32.0 30.7 15.1 26.3

21-40 percent owned 117 23.0 27.8 20.5 27.0 16.3

41 percent or more owned 157 30.8 12.4 35.2 36.8 33.8

Farm Income

$19,999 or less 196 38.5 14.4 35.0 41.2 69.5

$20,000 - $49,999 104 20.4 15.5 25.4 20.3 15.9

$50,000 - $99,999 103 20.2 22.7 22.0 23.5 7.3

$100,000 or more 106 20.8 47.4 17.5 15.0 7.3

Debt-to-asset Ratio

0 - 40 percent 159 31.2 37.1 28.8 34.6 23.2

41 - 70 percent 184 36.1 41.2 36.7 32.0 36.6

71 percent or more 166 32.6 21.6 34.5 33.3 40.2

Farmer Age

39 years or younger 151 29.7 35.1 30.5 25.5 29.3

40 - 49 years 164 32.2 30.9 32.8 29.4 37.8

50 years or older 194 38.1 34.0 36.7 45.1 32.9

Page 12: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

6

REGION

Farms are classified in one of four geographic regions in North Dakota, based on the location of their FarmBusiness Management program. However, farms enrolled in the Bismarck program are classified as "west or"south central" according to which side of the Missouri River the farm is located. Also, some farms that areenrolled in the Casselton and Wahpeton programs are not in the Red River Valley and are classified assouth-central. The southern area of the "west" region is better represented than the northern area. The northernarea of the Red River Valley has had little representation since 1997. Locations of North Dakota Farm BusinessManagement programs that participated in the 2006 summaries are:

Red River Valley: Wahpeton and CasseltonNorth Central: Bottineau, Devils Lake, Langdon, Minot, and RugbySouth Central: Bismarck, Carrington, Jamestown, and Napoleon West: Bismarck, Dickinson, and Glen Ullin

Highlights

C In 2006 the median farm size increased from the Red River Valley (1,329 acres, all crop land) to the westregion (2,763 acres, including pasture). Median farm size was 2,263 acres (1,809 crop acres) in the northcentral region and 1,819 acres (1,334 crop acres) for the south central region .

C Several farm characteristics are strongly related to region. Red River Valley farms are more likely to becrop farms and typically have smaller total acreage (crop land and pasture) but much larger total farmsales, assets, and liabilities than farms in other regions.

C In 2006, the incidence of livestock and mixed enterprise farms ranged from only 1% in the Red RiverValley to 80% in the west.

C Financial performance for the west region in 2006 was the worst for any region in any year over the1997-2006 period. Median net farm income plummetted to $689 from $43,987 in 2005.

C Red River Valley financial performance was the strongest of any region in 2006 and was much improvedfrom 2005. Financial performance was similar for the north central and south central regions in 2006 dueto an improvement in the north central and a sharp decline in the south central region relative to itsunusually strong performance in 2005. Median net farm income was up 71%, to $83,970, in the RedRiver Valley and 18%, to $34,777, in the north central region. It dropped 47% , to $32,576 in the southcentral region.

C Median current ratio in 2006 was 1.4 in the Red River Valley, 1.2 for the south central and 1.1 for thenorth central and west regions. Both the 2006 and the five year average, 2001-2005, median debt-to-assetranged from 49% in the Red River Valley to about 59% in the west region.

C The five-year average, 2001-2005, median rate of return on equity ranged from 9.6% in the Red RiverValley to 4.6% in the north central region. In 2005 it was 10.7% in the Red River Valley, 1.9% in thenorth central, 1.5% in the south central, and -6.0% in the west region.

C The five year average, 2001-2005, median term debt coverage ratio ranged from 1.7 in the Red RiverValley to 1.1 in the south central region. In 2006 it was highest, 2.2, in the Red River Valley and lowest,0.6, in the west region.

Page 13: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

7

FARM ENTERPRISE

Farms were classified as “crop” if 70% or more of total sales were from crops, and “livestock” if livestock salesaccounted for 70% or more of total sales. The remaining farms were classified as “mixed”. The “livestock” farmtype is dominated by the beef cow-calf enterprise.

Highlights

C In 2006, 66% of farms were classified as crop, 18% as livestock and 16% were mixed enterprise farms.

C Nearly one-half of the west region farms were classified as livestock in 2006, compared to none in theRed River Valley, 14% in the north central and 21% in the south central regions.

C In every year, 1997-2006, crop farms were larger than livestock and mixed enterprise farms as measuredby median total assets, total liabilities, and gross income. The only year in which median net farm incomeof both livestock and mixed enterprise farms exceeded that of crop farms was in 2005. Profitability oflivestock farms was similar to crop farms in 1997 and 2001.

C Livestock farms had their best financial performance in 2005. It is the only year in the 1997-2006 periodwhere livestock farms had better solvency and rates of return on assets and equity than crop farms. Also,the median current ratio of 1.7 and operating expense (all expenses except depreciation and interest) as apercent of gross revenue, 55.8%, were the best for any farm type over the 10 year period.

C In 2006, median net farm income for crop farms increased 34%, to $53,642, but decreased 85%, to$6,151, for livestock farms and 47%, to $24,334, for mixed enterprise farms.

C The median asset turnover ratio in 2006 was 0.48 for crop farms, 0.29 for mixed enterprise farms and 0.21for livestock farms. A higher ratio for crop farms is typical.

C Livestock farms had the lowest median term debt coverage ratio, 0.7, in 2006, but the highest, 1.7, in2004 and 2005, compared to other farm types.

C In 2006, the median interest expense as a percent of gross revenue increased to 6.0% for crop farms,10.9% for livestock farms, and 10.1% for mixed enterprise farms. Every year, 1997-2006, crop farms hadthe best measure.

C In 2006, crop farms had the best performance in converting gross income into net income, 16.1%,compared to 6.0% for livestock farms. However, in 2005, livestock farms had the best, 28.2% thatoccurred during the 1996-2005 period.

Page 14: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

8

Figu

re 1

. Med

ian

Tota

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m A

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1998

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1998

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Figu

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1998

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2006

Cro

p L

ives

tock

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ed

Page 15: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

9

FARM SALES

Farms were classified in one of four cash farm sales categories. Farm sales include cash receipts from crop andlivestock sales, government payments, and other farm income.

The categories were: less than $100,000$100,000 to $249,999$250,000 to 499,999$500,000 or more

Highlights

C Median farm sales were $281,751 in 2006 and average farm sales were $361,418. The percentage offarms with over $500,000 of sales has increased from 6% to 21% over the past 10 years.

C Gross sales are correlated to region and farm type. In 2006, 40% of Red River Valley farms had sales inexcess of $500,000, compared to 15% in the west region. Also, crop farms were five times more likely tohave sales in excess of $500,000 than were livestock farms.

C As expected, young farmers typically have lower sales than older farmers. However, farmers between theages of 40 and 49 are more likely to have farm sales greater than $500,000 than farmers 50 years andolder.

C A strong relationship between gross sales and financial performance is typical. However, in 2006, farmswith $100,000 to $249,999 sales had a lower median current ratio, rates of return on assets and equity,operating profit margin, term debt coverage ratio, and net farm income as a percent of gross revenue thanfarms with sales less than $100,000.

C In 2006, median net farm income declined 58%, to $5,563, for farms with less than $100,000 sales, and

55%, to $14,107, for farms with sales $100,000 to $249,999, but increased 6%, to $60,175, for farms withsales $250,000 to $499,999, and 17%, to $119,008, for farms with sales greater than $500,000.

C Farms with low sales typically have higher debt-to-asset. The five-year average, 2001-2005, median debt-to-asset was 62.1%, 58.8%, 51.6%, and 46.3% for the lowest to highest farm sale groups, respectively.

C Typically, repayment capacity is directly related to amount of sales. The five-year average, 2001-2005,median term debt coverage ratio was 1.2, 1.2, 1.5, and 1.9 for the lowest to highest farm sale categories,respectively. Only in 1997 and 2005 did farms with less than $100,000 sales have better repaymentcapacity than both farm groups between $100,000 and $500,000 sales.

C From 1997-2006, farms with sales under $100,000 had the best operating expense as percent of grossrevenue, but the worst interest expense ratio, and usually the worst depreciation expense ratio.

Page 16: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

10

Figu

re 5

. Med

ian

Tota

l Far

m A

sset

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abilit

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by F

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les,

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Pro

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, N.

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Mgt

Pro

gram

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00

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1997

1998

1999

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2001

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2004

2005

2006

$99

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1998

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024681012141618

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1998

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Page 17: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

11

FARM SIZE

Both crop and pasture acres were included in determining farm size.

Farm size categories were: 1,999 acres or less 2,000 acres or more

Highlights

C Because of less pasture land and more productive crop land only one-fourth of the Red River Valleyfarms were larger than 2,000 acres, compared to two-thirds of west region farms and about one-half offarms in the central regions.

C From 1999 to 2006, mixed enterprise farms were slightly more likely to be larger than 2,000 acres thanwere crop or livestock farms.

C In 2006, less than one-third of farmers under 40 years old operated more than 2,000 acres compared to

two-thirds of farmers between 40 and 49 years old and one-half of farmers over 50 years or older.

C As expected, farms with greater than 2,000 acres have greater assets, liabilities, sales and profitabilitythan smaller farms. Larger farms also have better solvency.

C In 2006, median net farm income was $27,950 for farms with less than 2,000 acres and $49,897 for farmswith more than 2,000 acres. Historically, farms with more than 2,000 acres have about twice the netincome of the small farm group.

C Farms larger than 2,000 acres had a similar median current ratio as smaller farms in 2006, 1.2, but slightlybetter for the five year 2001-2005 average, 1.4 to 1.3, respectively.

C In 2006, median debt-to-asset was 60.1% for farms with less than 2,000 acres and 53.4% for larger farms.

C Median term debt coverage ratio is typically better for farms with more than 2,000 acres than for smallerfarms, but was the same, 1.15, in 2006. Although smaller acreage farms generate less farm cash income,they tend to have more non-farm income than larger farms.

C Financial efficiency measures of farm size groups tend to be similar. This indicates that greaterprofitability of farms larger than 2,000 acres is due to larger sales volume and/or greater operator laborefficiencies not lower operating expenses per dollar of sales.

Page 18: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

12

CROPLAND TENURE

This is a classification of the portion of crop land that is rented. Four categories were used.

Full tenant 1-20 percent owned 21-40 percent owned 41 percent or over owned

Highlights:

C Ownership of crop land is less likely in the Red River Valley. In 2006, only four out of ten of Red RiverValley farms owned more than 20% of the crop land they operated, compared to one-half of west regionfarms and about 60% of farms in the central regions.

C Crop land ownership increases with age. In 2006, farmers 50 years or older were over twice as likely toown more than 40% of their crop land were young farmers. Four of ten young farmers rented all of theircrop land, compared to one of ten farmers 50 years or older.

C Operators of livestock and mixed enterprise farms own a greater portion of their crop land than cropfarms. One-half of livestock farms and over one-third of mixed enterprise farms own more than 40% ofthe crop land that they operate, compared to one-fourth of crop farms.

C Interestingly, small farms (less than 2,000 acres) were more likely to either own no crop land or to ownmore than 40% of crop land than were large farms (more than 2,000 acres).

C Farms that own some land, but not a lot, are typically the most profitable. Farms in the 1 to 20% crop landownership category, followed by farms with 20-40% crop land ownership, are also most likely to be cropfarms, farm more acreage, and have larger sales.

C During 1997 to 2006 there is no clear relationship between current ratio and land tenure except that farmswith greater than 40% crop land ownership tend to have a slightly better median current ratio.

C Farms with greater than 40% crop land ownership typically have better solvency than other crop landownership groups. The five-year average, 2001-2005, median debt-to-asset ratio was 61.2% for farmswith no crop land ownership compared to 49.1% for farms with crop land ownership greater than 40%.One reason could be that older, more established farmers own a greater portion of their crop land.

C In 2006, median net farm income ranged from $58,022 for farms with 1 to 20% crop land ownership to$23,537 for farms that rent all crop land.

C Typically, the lower profit of farms with greater than 40% crop land ownership, compared to farms with 1to 40% crop land ownership, is associated with the fact these farms are more likely to also be in livestock,low sales, and small size farm categories and less likely to be in the Red River Region.

C Farms with a smaller proportion of crop land ownership have fewer land assets and land interest costs andtherefore have higher asset turnover ratios and lower interest expense as a percent of gross revenue.

Page 19: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

13

Figu

re 9

. Med

ian

Net

Far

m In

com

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Cro

p La

nd T

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e,

1997

-200

6, N

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arm

Mgt

Pro

gram

0

10,0

0020

,000

30,0

0040

,000

50,0

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,000

70,0

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,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Ful

l ten

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1-2

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2006

, N.D

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m

0.20

0.30

0.40

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0.70

1997

1998

1999

2000

2001

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2004

2005

2006

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re 1

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1998

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2000

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2002

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2004

2005

2006

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re 1

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edia

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Per

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051015202530

1997

1998

1999

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2005

2006

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Page 20: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

14

NET FARM INCOME

Four levels of net farm income were used to group farms.

$19,999 or less$20,000 - $49,999$50,000 - $99,999$100,000 or more

Highlights

C Farm profit is volatile. Year-to-year changes in median net farm income within regions and farm typesaveraged 50% over the past 10 years. Volatility is less when all farms are grouped together. Statewide, themedian net farm income has declined 15%, 6%, and 9% in the years 2006, 2005, and 2004, respectively.

C The highest median net farm income in the 1997-2006 period was $49,181 in 2003 and the lowest was$14,290 in 1997. It was $35,980 in 2006.

C The Red River Valley region had the highest median net farm income every year from 1997 to 2006,except for 1998 and 2005. In 2006, nearly one-half of Red River Valley farms exceeded $100,000 netfarm income while over 70% of west region farms had net farm income less than $20,000.

C Typically, crop farms have been more profitable than livestock farms. In 2006, over one-half of cropfarms had net farm income greater than $50,000 compared to 18% of livestock farms. Two-thirds oflivestock farms earned less than $20,000.

C The typical strong associations between net farm income and farm sales and farm size were greatlyreduced in 1997.

C In 2006, 63% of farms with sales greater than $250,000 had net farm income greater than $50,000. Over70% of farms with less than $100,000 sales and 56% of farms with sales $100,000 to $249,999 earnedless than $20,000.

C In 2006, one-half of farms larger than 2,000 acres had net farm income greater than $50,000, compared toone-third of smaller farms.

C From 1999 to 2006, farmers 40 to 49 years old had higher median net farm income than farmers that wereyounger or older. However, in 1997 and 1998, farmers less than 40 years old had the highest median netfarm income.

C Solvency, liquidity, repayment capacity, and financial efficiency were strongly correlated with net farm

income.

C In 2001, low-debt farms (less than 40% debt-to-asset) were five times more likely to have net farmincome in excess of $50,000 than high-debt farms (greater than 70% debt). In other years, 1997-2006,low-debt farms were three to four times more likely to have net farm income greater than $50,000.

Page 21: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

15

DEBT-TO-ASSET RATIO

Three ranges of debt-to-asset ratio were used to group farms.

0 - 40 percent41 - 70 percent71 percent or more

Highlights

C Median debt-to-asset was 57.5% in 2006 after ranging from 53.3% to 55.5% between the years 1999 to2005.

C Red River Valley farms, crop farms, large farms (greater than 2,000 acres) and farms with high sales(greater than $500,000 sales) nearly always had lower median debt-to-asset than other regions, farmtypes, farm size and farm sales groups, respectively, during the years 1997-2006.

C There is a strong inverse relationship between level of debt and liquidity, repayment capacity,profitability and financial efficiency measures. As debt-to-asset increases, these measures deteriorate.

C In 2006, farms in the low, medium and high debt-to-asset categories had median current ratios of 3.1, 1.1and 0.9; term debt coverage ratios of 2.7, 1.1 and 0.6; interest expense as a percent of gross revenue of3.8, 7.6 and 10.3; and net farm income as percent of gross revenue of 24.1, 14.2 and 3.3, respectively.

C In 2006, farms with sales less than $100,000 are over twice as likely to be in the high debt groupcompared to farms with sales greater than $500,000.

C As expected, percent debt-to-asset tended to decrease as age of farmer increased.

C Median net farm income for the low, medium, and high debt-to-asset categories in 2006 was $75,755,$35,883 and $4,507, respectively.

C In 2006, 4 out of 10 farms with low debt had net farm income greater than $100,000 compared to onlyone out of 25 high-debt farms.

Page 22: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

16

FARMER AGE

Three groups were used to classify farms by age of operator:

39 years or less40 - 49 years50 years or older

Highlights

C In 2006, 30% of farm operators were under 40 years old and 32% were 40 to 49 years old. The percent offarmers 50 and older has steadily increased from 19% in 1996 to 38% in 2006.

C Prior to 1999, the age of farmers tended to increase slightly from east to west, but from 1999 to 2006 theage distribution of farm operators has been similar for all regions.

C Farmers in the middle age group have typically had more total farm assets and liabilities, higher grosssales, larger farms and been more profitable than the younger or older age groups. However, in 2006, themedian net farm income was $32,664 for farmers less than 40 years old, $35,883 for farmers 40-49 yearsold, and $42,770 for farmers older than 50 years.

C Median total assets were lowest, 1997-2006, for farm operators less than 40 years old and were mostoften the greatest for farmers between 40 and 49 years old. However, median total assets of the older agegroup of farmers (50 years and older) is close to the asset level of the middle age group.

C As expected, as the age of the farm operator increases there is a higher percent of crop land owned, andthe percent of farm debt tends to decrease. In 2006, median debt-to-asset was 67.8% for farmers less than40 years old, 58.6% for farmers in the 40 to 49 age group and 45.7% for farmers 50 or older.

C The five-year average, 2001-2005, median current ratio was 1.3 for all age groups.

C In each year, 1997-2006, the young age group of farmers employed assets more efficiently than farmers50 and older. The young group had better median measures of ROA, ROE, asset turnover and net farmincome as percent of gross revenue despite having much fewer total assets and higher debt-to-asset.

Page 23: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

17

Figu

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Page 24: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

18

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Page 25: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

191919

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Page 26: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

20

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Page 27: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

21

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Page 28: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

22

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Page 29: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

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Page 31: Financial Characteristics of North Dakota Farms 2005-2006can be monitored by constructing financial measures on a periodic basis and comparing present to past performance. ÙIndustry

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26

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27

APPENDIX

DEFINITION OF FINANCIAL MEASURES

Sixteen measures of financial performance werecalculated for each farm in this study. Therecommendations of the farm financial standardscouncil for calculating the ratios were followed asclosely as possible, from the Finpack data.

The farm financial standards council stated that amore meaningful comparison between farms isachieved with market valuation of assets, but dueto fluctuations in market values the cost method(acquisition cost less accumulated depreciation) issuperior for comparisons over time for anindividual farm operation. In fact, a dual columnbalance sheet is recommended: one column tovalue assets by the cost approach and a secondcolumn for market valuation of assets.

The valuation method used for current assets offarms in this study depended on what was mostrelevant and reliable. For example, current marketvalue was used for grain and market livestockinventories, but prepaid expenses and supplieswere listed at purchase cost.

Non-current asset valuation was:

• Machinery was valued at cost minusaccumulated depreciation. Annual depreciationwas 10 percent of un-depreciated value.

• Purchased breeding livestock was valued atcost. Raised replacement animals were valuedat a conservative market value when they enterthe breeding herd. This value remains constantuntil the animal leaves the herd.

• Generally, land was valued at cost. However,when a farmer enrolls in the farm businessprogram there may be a one-time revaluing ofland to a conservative market value.

Assets and liabilities not associated with the farmbusiness are excluded from the calculation of farmfinancial performance measures. Accruedliabilities were included on the balance sheets butdeferred tax liabilities were not.

The calculations of all financial measures, unlessotherwise noted, are accrual adjusted. Examplesare:

• Gross farm revenue is gross cash revenue plusthe changes in crop and market livestockinventories and accounts receivable.

• Interest expense is cash interest plus the changein accrued interest.

LIQUIDITY

Current Ratio

Computation: Current assets divided by currentliabilities.

Interpretation: This ratio measures the extentcurrent assets will cover liabilities that are dueduring the next 12 months. The higher the ratio themore cushion the business has to meet short-runobligations without disrupting normal businessoperations. The current ratio's limitation as ameasure of liquidity is that it does not match thetiming of financial obligations with the liquidationof current assets, nor does it consider any new debtincurred or assets that may be generated during the12 months after the balance sheet date.

Working Capital

Computation: Current assets minus currentliabilities.

Interpretation: This measure shows the dollaramount that current assets can or cannot covercurrent liabilities. The amount of working capitalnecessary to provide an adequate cushion formeeting debt obligations must be related to thesize of the business. Working capital as a measureof liquidity has similar limitations as the currentratio.

SOLVENCY

Debt-to-Asset

Computation: Total liabilities divided by totalassets.

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Interpretation: This ratio shows the proportion ofassets owed to creditors. The lower thedebt-to-asset ratio the higher the solvency of thebusiness. Solvency is a measure of risk exposure.As solvency decreases, the owner has less equityrelative to debt, the ability to procure additionalfinancing may decrease, and the business's abilityto survive adverse outcomes is diminished.However, solvency should be viewed in connectionwith profitability. A low solvency position may bedesirable if debt capital provides returns in excessof its cost.

Equity-to-Asset

Computation: Owner equity divided by total assets.Interpretation: This ratio shows the portion of totalassets represented by owner equity. It is anotherway of expressing solvency.

Debt-to-Equity

Computation: Total liabilities divided by ownerequity.

Interpretation: This ratio shows the extent to whichdebt capital is combined with equity capital. It isanother way of expressing solvency.

PROFITABILITY

Rate of Return on Assets (ROA)

Computation: Net farm income plus interestexpense minus a charge for unpaid operator laborand management, divided by average total assets. Interpretation: This ratio measures the pre-tax rateof return on farm assets and is used to evaluatewhether assets are employed profitability in thebusiness. Two important factors affecting thismeasure are valuation of assets and the charge forunpaid operator labor and management. Fivepercent of gross revenue plus a $18,000 charge perfull time operator was used.

Rate of Return on Equity (ROE)

Computation: Net farm income minus a charge forunpaid operator labor and management, divided byaverage owner equity.

Interpretation: This ratio measures the pre-tax rateof return on equity capital employed in the

business. Two important factors affecting thismeasure are valuation of assets and the charge forunpaid operator labor and management. Fivepercent of gross revenue plus a $18,000 charge perfull time operator was used. This ratio should beevaluated carefully and used in conjunction withother ratios when analyzing a farm business. IfROE is greater than ROA, debt capital is beingemployed profitably—it is earning more than itcosts in interest. A high ratio may indicate anundercapitalized or highly leveraged business, anda low ratio may indicate a more conservative, highequity business. Operating Profit Margin

Computation: Net farm income plus interestexpense minus a charge for unpaid operator laborand management, divided by the value of farmproduction. Value of farm production is gross farmrevenue less purchase of market livestock andfeed.

Interpretation: This ratio measures net farmincome per dollar of farm production. It is apre-tax measure of profit margin from theemployment of assets. An important factor is thecharge for unpaid operator labor and management.There is a relationship between operating profitmargin, asset turnover rate, and ROA. Operatingprofit margin multiplied by asset turnover rateequals ROA.

Net Farm Income

Computation: Net farm income is total revenueearned minus the costs incurred to generate thoserevenues. It is cash revenue less cash expense anddepreciation plus capital adjustments (gain or lossfrom sale of capital assets). Accrual adjustmentsfor changes in inventories are included to properlymatch revenues and expenses to the time periodfor which net farm income is being measured.

Interpretation: Net farm income is the return to theoperator for unpaid labor and management andequity capital used in the farm business. Net farmincome is an absolute amount and it is difficult toassign a standard to all farms because ofdifferences in the amount of unpaid operator laborand equity used.

REPAYMENT CAPACITY

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Term Debt Coverage Ratio

Calculation: Net farm income plus depreciation andother capital adjustments plus non-farm incomeplus scheduled interest on term debt minus familyliving expense and income taxes, divided byscheduled term debt principal and interestpayments.

Interpretation: This ratio measures the capacity ofthe borrower to cover all term debt payments. Themore the ratio exceeds 1, the greater the margin tocover term debt payments. The business may havesufficient earnings but the timing of cashflows maynot be adequate to make the payments on a timelybasis. Also, the ratio does not contain any provisionfor replacement of capital assets.

Capital Replacement and Term DebtRepayment Margin

Calculation: Net farm income plus depreciation andother capital adjustments plus non-farm incomeminus family living expense, income taxes, andscheduled term debt principal payments.

Interpretation: This is a measure of the business'sability to make payments on term debt. A positivemargin indicates the amount available, after makingterm debt payments, for acquiring capital assets orservicing additional debt. The capital replacementand term debt repayment margin is a dollar amount,so it is impossible to establish a standard for allfarm businesses.

FINANCIAL EFFICIENCY

Asset Turnover

Calculation: Value of farm production divided byaverage total assets. Value of farm production isgross farm revenue less purchase of marketlivestock and feed.

Interpretation: This is a measure of how efficientlyassets are used in the business. The higher thenumber, the more production is created per dollarof assets. Asset turnover can vary significantly bytype of farm and by asset base. For example, dairyand hog farms will typically have higher assetturnovers than cow-calf or cash grain operations.Asset turnover will probably be higher if capital

assets, such as machinery and land, are rentedinstead of owned.

Operating Expense Ratio

Calculation: Total expense less interest anddepreciation and capital adjustment divided bygross farm revenue.

Interpretation: This ratio measures how efficientlyoperating expenses are managed to generate grossfarm revenue. The operating expense ratio willtypically vary by farm type.

Depreciation Expense Ratio

Calculation: Depreciation and capital adjustmentsdivided by gross farm revenue.

Interpretation: This ratio expresses depreciationand capital adjustment relative to gross farmrevenue. It will vary by farm type and from year toyear. Caution must be used when evaluating thisratio. It does not comply with the farm financialstandards because the Finpack program, used togenerate the farm financial summaries, calculatesdepreciation and capital adjustment as one number(ending inventory plus capital sales less the sum ofbeginning inventory and capital purchases).Therefore depreciation cannot be isolated.

Interest Expense Ratio

Calculation: Interest expense divided by grossfarm revenue.

Interpretation: This ratio shows the portion ofgross farm revenue necessary to cover interestexpense. It is often used as a measure of financialrisk.

Net Farm Income Ratio

Calculation: Net farm income divided by grossfarm revenue.

Interpretation: This is a measure of how efficientthe farm business is at generating net income fromgross revenue. It is the portion of gross farmrevenue left after operating expense, depreciationand capital adjustment, and interest expense havebeen removed.

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REFERENCES

Farm Financial Standards Task Force. 1991. Financial Guidelines for Agricultural Producers:Recommendations of the Farm Financial Standards Task Force. American BankersAssociation, Agricultural Bankers Division, Washington, DC.

North Dakota Agricultural Statistics Service. 2006. North Dakota Agricultural Statistics. NorthDakota State University, Fargo, and U.S. Department of Agriculture, Washington, DC.

Swenson, Andrew L. 2006. Financial Characteristics of North Dakota Farms, 2004-2005.Agribusiness and Applied Economics Report No. 588, Department of Agribusiness andApplied Economics, North Dakota State University, Fargo, Websitehttp://agecon.lib.umn.edu/

Swenson, Andrew L. 2004. Financial Characteristics of North Dakota Farms, 2001-2003.Agribusiness and Applied Economics Report No. 546, Department of Agribusiness andApplied Economics, North Dakota State University, Fargo, Websitehttp://agecon.lib.umn.edu/

Swenson, Andrew L. 2001. Financial Characteristics of North Dakota Farms, 1998-2000.Agribusiness and Applied Economics Report No. 467, Department of Agribusiness andApplied Economics, North Dakota State University, Fargo, Websitehttp://agecon.lib.umn.edu/.

Swenson, Andrew L. 1998. Financial Characteristics of North Dakota Farms, 1995-1997.Agricultural Economics Report No. 403. Department of Agricultural Economics, NorthDakota State University, Fargo. Website http://agecon.lib.umn.edu/