Farm Credit Services of America (FCSAmerica) and Frontier Farm Credit are co-sponsoring a webinar series, Two Economists and a Lender. Our latest installment featured Agriculture Economic Insights (AEI) co-founders David Widmar and Brent Gloy, and Reid, financial officer. The webinar recording from December 19 is available. Explore upcoming webinars.
With dozens of financial metrics to measure and follow, we reviewed the critical ratios headed into 2025 and sharing strategies to consider on your farm.
The end of the calendar year is an ideal time to evaluate your farm business and see where things stand. Monitoring financial metrics is crucial to establishing a baseline and understanding trends and performance. For 2025, we recommend focusing on three key financial measures: fixed costs, liquidity and family living expenditures. These metrics can significantly impact your farm's financial health. Understanding them allows you to identify trends and make changes before problems develop.
Fixed Costs
Fixed costs, or fixed obligations, are expenses that do not change with the level of output. These include land costs, debt payments, cash rents, taxes, and machinery expenses. Understanding and managing these costs can help improve your farm's financial performance relative to your peers.
Key Components:
Land costs: This includes cash rent, annual land payments, and property taxes. Calculate these costs per acre to get a clear picture of your land charge.
Machinery costs: Add up your annual machinery payments or lease payments and divide by your total acres to understand your machinery cost per acre.
If your total land charge is $250 per acre and your machinery cost is $50 per acre, your combined fixed cost is $300 per acre. This is a manageable number in many regions, but if it starts to exceed $325 per acre, it may be time to reassess and make necessary adjustments.
Additionally, your fixed costs need to align with what can be generated through contribution margins. Contribution margins vary by region and commodity. They are used to cover overhead and, if sufficient, generate a profit. For instance, if soybean production yields $540 gross income per acre, having fixed costs north of $300 leaves little room for profitability.
Liquidity
Liquidity is essentially the cash available to pay your bills versus the cash needed to pay them. It's a measure of how quickly you can convert assets to cash to cover expenses or liabilities due within the next year. Monitoring liquidity can help you meet your financial obligations without causing undue stress.
Key Measures:
Working capital: This is calculated by subtracting current liabilities from current assets. It gives a gross number indicating how much cash and near-cash assets are available to cover bills.
Working-capital-to-revenue ratio: This ratio compares working capital to annual revenues, providing a relative measure that can be benchmarked across operations.
If you have $500,000 in working capital and farm 1,000 acres, that's $500 per acre. This is a strong position, indicating you likely won't need to borrow against your line of credit frequently. However, if the same $500,000 is spread over 2,500 acres, it drops to $200 per acre, which is still a good benchmark but requires careful management.
Family Living Expenditures
Family living expenses can fluctuate significantly and impact your overall financial health. It is essential to have a plan for family living expenses. Sit down and budget these expenses and get everyone involved in the operation on the same page. This collaborative approach helps in managing and executing the plan effectively.
Benchmarking and Improvement
Benchmarking your fixed costs, liquidity and family living expenses against regional standards can help identify areas for improvement. Discuss these benchmarks with your Farm Credit financial officer to understand how your farm compares and where adjustments can be made.
