Livestock profitability won’t keep up with crop figures

the average farm operation received $7,792 in crop insurance payments in 2022, which was considerably lower than the level of crop insurance payments from 2018-2020. The combination of farm program payments and crop insurance payments accounted for approximately 4.7 percent of the 2022 average net farm income. This compares to 2020, when government payments and crop insurance payments totaled over $126,000 and made up about 74 percent of the average net farm income.

The average family living expense in 2022 was $71,375, which increased slightly compared to recent years. The average non-farm income in 2022 was $45,240, which represents about 38 percent of total annual non-farm expenses ($121,163) by families for family living and other uses.

In 2022, the average farm business spent $1,281,210 for farm business operating expenses, capital purchases, and non-farm expenses. Most of these dollars were spent in local communities across the region, helping support the area’s overall economy.

Farm financial analysis

(Note: Refer to the accompanying table for a five-year (2018-2022) comparison of various average farm-related financial data, as well as average crop and livestock data.)

The average net farm income for southern and west central Minnesota for 2022 was $311,240, while the median net farm income for the region was $177,614. This compares to median net farm income levels of $176,426 in 2021, $102,848 in 2020, $36,547 in 2019, and $20,655 in 2018.

As usual, there was large variation in median farm income in 2022, with top 20 percent profitability farms averaging a median net farm income of +$728,237, and the low 20 percent profitability farms with an average median net farm income of only +$13,238.

The variation in 2022 median net farm income also tracked very closely with the gross farm receipts of farms. Farms with $1 to $2 million in gross receipts had a median net farm income of +$433,787, compared to +$224,828 for farms with a gross of $500,000 to $1 million, +$125,428 for farms with a gross of $250,000 to $500,000, and +$56,528 for farms with a gross of $100,00 to $250,000. Interestingly, there was very little difference in the profit margin between the income groups. The $100,000 to $250,000 group was at 25.1 percent profit margin, the $250,000 to $500,000 group at 28.4 percent profit margin, the $500,000 to $1 million group at 27.4 percent profit margin, and the $1 to $2 million group at 27.6 percent profit margin.

The average farm business showed working capital of +$601,008 in 2022, which is three times higher than the average working capital three years ago in 2019. The current ratio (current assets divided by current expenses) for 2022 was 283 percent, which compares to 247 percent in 2022, 198 percent in 2020, and 156 percent in 2019. The working capital to gross revenue ratio for 2022 was 49.4 percent, which is more than double the level in 2018 and 2019. The working capital had declined to concerning levels for many farm operations prior to 2020, before showing significant improvement from 2020-2022.

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 percent, it results in the farm business being required to use working capital or nonfarm income sources to cover the difference. The average term debt coverage ratio for 2022 was at the healthy level of 372 percent, which compares to average ratios 389 percent in 2021, 274 percent in 2020, 148 percent in 2019, and 91 percent in 2018. However, the low 20 percent profitability farms had a term debt coverage ratio of only 85 percent in 2022.

Any additional cash flow dollars over and above the term debt principal and interest payments earned by farm operation are available for machinery replacement or other capital improvements. In 2022, the average farm had $224,856 available for those purposes, while high 20 percent profitability farms had $726,122 available. This helps explain the strong demand for new and used farm machinery, the many plans for grain system improve- ments, and other farm and non-farm upgrades which have occurred in recent months.

Bottom line…

Overall, net returns from crop operations in 2022 were among the best ever. However, livestock profitability was much more modest. As usual, there was a wide variation in farm profit levels from the top one-third of net farm income operations as compared to other farms.

The overall average financial health of many farm businesses has improved significantly during the period from 2020-2022, after declining for several years due to low profit levels.

Farm profit levels were quite favorable in 2022. However, there are some “caution flags” on the horizon. These include rapidly increasing input expenses and land costs, potential declines in grain and livestock market prices, and lower levels of government payments.

Complete farm business management results are available through the University of Minnesota Center for Farm Management FINBIN Program at http://www.finbin.umn.edu/.

Kent Thiesse is a government farm programs analyst and a vice president at MinnStar Bank in Lake Crystal, Minn. He may be reached at (507) 7262137 or kent.thiesse@minnstarbank. com. v