NE Current Events:
Nebraska land values are up 5% over the previous year. The final report will be published in June. Nebraska ag land values up 5%, according to 2024 Farm Real Estate Survey | Center for Agricultural Profitability (unl.edu)
La Nina has a 62% chance of developing by June-August 2024. Mar 15, 2024: Active End of March | 2024 Growing Season Fcst | 1988, 2016, 2010 v 2024 | BRA Drought (youtube.com)
SW Financial Literacy
No Two Are the Same
A word of caution to those who aren’t prepared.
Suppose two local farmers are bidding on two identical tracts of farm ground in the same section. They both updated their year-end balance sheets 2 months ago and were told they were in a strong financial position by their lender. Both farmers have the exact same Current Ratio of 1.75:1 and Owner’s Equity of 65%.
They each won the bid for one tract at the same selling price of $9,500/a on 80 acres.
Let’s review their positions.
Farmer A has been growing his operation steadily for the past 30 years. He has made plenty of purchasing mistakes but has survived through several tough ag cycles. Here are his financials before and after the purchase:
Farmer A put a lot of cash into the purchase for 65% financing. If his cash flow is providing acceptable profits, a Current Ratio of 1.48:1, Working Capital near $500k, and Owner’s Equity over 60% leave him in a stable position.
Farmer B has been on the farm for 3 years and is ambitious to grow. He knows adding acres will create more money, so he bids without doing scenarios on his balance sheet but does plan on financing 100% with FSA joint financing. Here are his financials before and after the purchase:
Farmer B doesn’t have the cash for traditional financing and had to go an alternative route. With 100% financing, an Owner’s Equity of 19.59% leaves him overleveraged while a Working Capital of $11k doesn’t give nearly enough margin for error. Regardless of the cash flow position, this is too much debt to take on. Farmer B needs to look for a smaller property, identify a partner, or wait longer to generate a more resilient balance sheet.
I am HOPEFUL to provide you with an updated balance sheet spreadsheet next week to allow you to run your own purchase scenarios. Much more to come.
Have a great week!
Grant
All views expressed on this site are my own and do not represent the opinions of any entity whatsoever with which I have been, am now, or will be affiliated. Information provided is authentic to the best of my knowledge, and as such, is prone to errors and the absence of key details. The content of this blog is for entertainment and informative purposes and should not be seen as professional advice to finances or any other field.