Crop Revenue Would Need To Drop 21.4% to Equal 1980 Income Shock

The Kansas City Federal Reserve just issued a paper on the Nebraska economy and I found a couple of the pages in the paper interesting.  First, to equal a 1980s income shock, current farm revenue would need  to drop by 21.4% and the value of total farm production would need to decrease by 15.7%.

Now 21.7% may not sound that high, but lets assume you are a farmer who raises corn that yields 175 bushels per acre and expects around $6 per bushel.  Your cash rent is $275 and other total expenses are another $700 per acre.  Your gross income is $1,050 and cash expenses are $975.  You are netting about $75 per acre.

Now if your gross farm income was to decrease by 21.7%, it would fall to about $822 per acre of gross income and if all other expenses remained the same, then you now have a net loss of $153 per acre.

The paper also estimated that crop prices would need to drop to the following prices:

• Corn – $3.49 per bushel
• Wheat – $3.96 per bushel
• Soybeans – $9.00 per bushel

One more slide showed the debt-to-asset ratio for 1979 to 2010.  The perception is that most farmers in 1979 were more highly  leveraged than now.  For Kansas farmers, the percentage of farmers with a debt to asset ratio greater than 40% was 19.4% in 1979, but for 2010 it is 6 points higher at 25.6%.  The debt-to-asset ratio of farmers with levels greater than 70% is almost 6% now versus less than 2% in 1979.

Since Kansas has a higher concentration of livestock producers than many other corn belt states, it is my guess that this tilts the analysis a bit, but there are many farmers with high levels of leverage that may not survive a “1980s” income shock.

How does your operation stack up?

Paul  Neiffer, CPA