Focus on Ag: 2020 farm income levels rose considerably
The University of Minnesota recently reported that the median net farm income for southern and western Minnesota farmers in 2020 was $102,848, which is the highest level since 2012.
The 2020 net farm income level followed seven years in a row (2013-2019) of subpar net farm income levels in the region. The 2020 net farm income levels in that region were enhanced by robust crop profits that resulted from above average crop yields, improved grain market prices and significant levels of government program payments. Livestock profit margins were also improved compared to recent years, albeit more modest than crop profits.
The Farm Business Management (FBM) summary for southern and west central Minnesota is prepared by the Farm Business Management Instructors, which is then analyzed by specialists at the University of Minnesota Extension. This summary includes an analysis of records from farm businesses of all types and sizes in southern and western Minnesota. This annual farm business summary is probably one of the best gauges of farm businesses profitability and financial health in the region on an annual basis. Following are some of the key points and data that were in the 2020 FBM summary:
Net farm income is the return to labor and management, after crop and livestock inventory adjustments, capital adjustments, depreciation and other miscellaneous items have been taken into account. This is the amount that remains for family living, non-farm capital purchases, income tax payments and for principal payments on farm real estate and term loans.
The median net farm income is the midpoint of net farm income of all farm operations included in the FBM summary, meaning that half of the farms have a higher net farm income and half have a lower net income.
A total of 1,543 farms located in south central, southwest, southeast and west central Minnesota were included in the 2020 FBM summary.
The average farm size was 671 acres. The top 20% net income farms averaged 975 acres, while the bottom 20% net income farms had 278 acres.
Fifty-six percent of the farm operations were cash crop farms, 16% were single entity livestock operations, with the balance being various combinations of crop, livestock and other enterprises.
465 farms (30%) were under $250,000 in gross farm sales in 2020; 352 farms (23%) were between $250,000 and $500,000 in gross sales; 366 farms (24%) were between $500,000 and $1 million in gross sales; and 360 farms (23%) were above $1 million in gross sales.
In 2020, the average farm business received $110,244 in government program payments, which included two rounds of CFAP payments for crop and livestock producers, WHIP+ crop disaster payments for 2018 and 2019, PLC and ARC-CO payments, CRP payments and other government payments. In addition, the average farm operation received $16,707 in crop insurance payments, primarily to offset reduced 2019 yield reductions. The combination of one-time COVID-19 relief payments, crop disaster payments, regular farm program payments and crop insurance payments accounted for approximately 74% of the 2020 net farm income.
The average family living expense in 2020 was $60,814, which has declined in recent years with medical expenses and health insurance costs accounting for 16% of the total expenses. The average non-farm income in 2020 was $45,717, which represents over half of total annual non-farm expenses by families.
In 2020, the average farm business spent $959,834 for farm business operating expenses, capital purchases, and family living expenses. Most of these dollars were spent in local communities across the region, helping support the area’s overall economy.
Farm financial analysis
The average net farm income for southern and west central Minnesota for 2020 was $175,216. The median net farm income for the region in 2020 was $102,848. Median net farm income levels for 2015-2019 are as follows:
As usual, there was large variation in net farm income in 2020, with the top 20% profitability farms averaging a net farm income of greater than $560,317, and the low 20% profitability farms with an average net farm income of a negative $18,372. Less than 10% of the farm operations showed a negative average net farm income for 2020, which is its lowest level in several years.
The average farm business in 2020 had a very favorable profit margins (21.2%), a decreasing debt-to-asset ratio (44%) and an increasing current ratio (198%). The current ratio measures the working capital for the farm operation, which is the current assets minus the current liabilities in a farm business. The working capital had declined significantly for many farm operations in recent years. The improved working capital has put many farm operations in a much healthier financial position for 2021.
Another measure of the “financial health” of a farm operation is the term debt coverage ratio, which measures the ability of farm operations to generate adequate net farm income to cover the principal and interest payments on existing real estate and term loans. If that ratio falls below 100%, it results in farm operators having to use working capital or non-farm income sources to cover the difference. The average term debt coverage ratio for 2020 was at the healthy level of 274%, which was significantly improved from the average ratios 148% in 2019, 91% in 2018, 102% in 2017, and 90% in 2016. However, the low 20% profitability farms had a term debt coverage ratio of only 72% in 2020.
Any additional cash flow dollars over and above the term debt principal and interest payments that are earned by farm operation are available for machinery replacement or other capital improvements. In 2020, the average farm had $116,287 available for those purposes, while top 20% profitability farms had over $400,000 available. This helps explain the strong demand for new and used farm machinery, plans for grain system improvements, and other farm upgrades that has occurred in recent months.
Net returns from both crop and livestock operations across the Upper Midwest were much improved for most farm operators in 2020; however, there was a wide variation in farm profit levels from the top one-third of net farm income operations as compared to other farms as usual. Livestock producers did not fair nearly as well as crop producers from a net profit standpoint in 2020. The added government payments to farmers due to the COVID019 pandemic and poor crop yields in 2019 had a big influence on farm profit levels. The overall average financial health of many farm businesses improved significantly in 2020 after declining for several years due to low profit levels. This has also helped strengthen the overall economy in many rural communities in the Upper Midwest.
Farm profit levels remain quite favorable in 2021; however, there are some caution flags on the horizon. These include the likelihood of much lower levels of government payments, rapidly increasing input expenses and much higher land purchase and rent costs. Grain prices are currently at their highest levels since 2012 and 2013, and livestock prices remain fairly strong; however, there is concern over potential future declines in grain and livestock market prices later this year or into 2022. Complete farm management results are available through the University of Minnesota Center for Farm Management FINBIN Program at: http://www.finbin.umn.edu/.
For additional information contact Kent Thiesse, farm management analyst and senior vice president, MinnStar Bank, Lake Crystal, Minn., at (507) 381-7960 or firstname.lastname@example.org, or visit www.minnstarbank.com.