A quiet crisis: Minnesota’s child care shortage (via Center for Rural Policy and Development)

By Marnie Werner, Research Director

A crisis has been quietly brewing throughout Minnesota and the nation for many years now. People have been getting out of the in-home family child care business at a disturbing rate, creating a severe shortage over most of the state. And while statewide data makes it appear that growth in child care centers is picking up the slack, that is not the case in much of Greater Minnesota.

Decisions regarding child care—whether to stay home with the kids or find care for them outside the home—has always been considered a personal decision, part of the “family bubble,” as Frameworks Institute puts it in their ongoing study of American attitudes toward child care.[1] This perspective, though, has perhaps been camouflaging the growing issue, keeping it out of the public eye. The reality is that the shortage is creating a ripple effect with very real impact, not just on families but on employers and entire communities, and the impact is being felt across the state.

Digging down through the data uncovers the complexity of the issue:

  • The U.S. Census Bureau estimates that in 2014, 74% of Minnesota households with children under age 6 had all parents in the workforce, third highest in the nation behind Iowa and South Dakota at 75%.
  • The change in the number of children age 0-4 between 2000 and 2015 varies from county to county, but the percentage of the total population they represent in each county has stayed remarkably steady, around 5% to 7%. In each county, that percentage barely changed over time, varying between a 2-percentage-point drop and a 1-percentage point increase. Only in Mahnomen County did the under-5 group increase by more than 1 percentage point, going from 7% of the population in 2000 to 10% in 2015.[2]
  • Between 2006 and 2015, the number of licensed in-home family child care providers decreased by more than one quarter (27%) across the state. In terms of capacity—the total number of children providers are licensed to care for—that translates to a loss of approximately 36,500 spaces.[3]
  • Over those same ten years, the number of child care centers increased by 8% statewide and their capacity grew by 27%, enough to fill about two thirds of the gap left by in-home providers exiting the business.

However, that statewide figure masks a huge divergence:

  • Most of the growth in center-based care in the last ten years occurred in the Twin Cities seven-county area. Center-based care capacity in the Twin Cities increased by 31%, or 19,400 spaces, more than enough to make up for the 16,000 in-home care spaces lost. In Greater Minnesota, center-based capacity increased by only 18%, or 5,039 spaces; in-home family child care capacity, in fact, decreased by 20,400 spaces for a net loss of more than 15,000 spaces.

The change in the number of licensed child care providers between 2006 and 2015 and the capacity they represent (MN Dept. of Human Services). 

FCC CCC Net change
Greater MN -20,416 5,039 -15,377
Twin Cities -16,125 19,409 +3,284

Capacity: The change in the number of spaces in in-home family child care (FCC) and center-based child care (CCC) between 2006 and 2015 (MN Dept. of Human Services).

 

  • Even with the growth trend in child care centers, every region of the state still shows a shortfall between the number of children potentially needing child care and the number of spaces available.

Looking past the data reveals a situation affecting family incomes and business productivity everywhere in the state.

  • Infants are by far the most difficult age group to find care for. The supply of infant care spots is now squeezed to a point where it is not unusual for families expecting babies to contact dozens of providers only to come up empty or be put on waiting lists of several months to a couple years. This has serious implications for women who would like to go back to work after the birth of their child.
  • Low-income families and single-parent families are particularly hard hit. Low-income parents are more likely to not have paid leave, while single parents have no second parent to share care with or second income to fall back on if something happens to their child care. The loss of child care can mean the loss of a job, thus hurting the family further financially.
  • Parents of children with special needs and parents who work non-traditional shifts have almost no choices for licensed child care.
  • Most of Minnesota is facing an unprecedented shortage in skilled labor. Employers are working hard to find talent, but recruits are turning down jobs in places where quality child care is unavailable or unaffordable.
  • In rural areas it’s not unheard of for a parent to drive upwards of 40 miles round trip, from home to another community to drop their child off with a provider, then to another community for work. It’s also not unusual to have children from one family at multiple locations.

Losing child care: the ripple effect

The mass exodus of in-home family child care providers from the business is alarming, but the reasons are understandable: providers can’t make a living at it. Salaries and wages in child care are a huge deterrent for would-be providers, especially when they have student loans to pay off and the job offers few to no benefits, says Nancy Jost, an early childhood specialist at West Central Initiative in Fergus Falls.

“They can’t make a living wage at it, so they don’t go into it,” Jost says.

More than 85% of child care workers would be considered low-wage workers, making less than $20,000 annually, says a 2014 article from the Minnesota Department of Employment and Economic Development.[4] The federal poverty line for a family of three that year was $19,890.[5]

Considering the level of education many providers have, they are still woefully underpaid, says a 2015 report from the National Academy of Sciences on the child care workforce.[6] It’s no wonder that many women holding an early childhood education license will quit child care and move into K-12 teaching positions as soon as the opportunity arises, says Jost. (And according to a 2011 report by the Minnesota Department of Human Services on the child care workforce, virtually all child care providers in Minnesota are women.[7])

In areas like Thief River Falls, where companies are offering $16 an hour and full benefits and are still begging for employees, child care providers find it hard to resist switching careers, says Vicky Grove, child care specialist at the Northwest Minnesota Foundation.

Each provider leaving the profession, however, creates a ripple effect. “One employer told me, when she hires a woman, she really hopes that woman wasn’t a child care provider, because if she was, [the employer] can expect calls from eight employees telling her they just lost their child care,” Grove says.

The solution may seem to be to pick up some of the slack through proposed pre-kindergarten programs, but taking four-year-olds into the public school system could put even more financial pressure on licensed child care providers.

As a general rule, among newborn to five-year-olds, infants are the most expensive to care for mostly because they require the highest staff-to-child ratio. Providers break even on toddlers and make a profit on preschoolers so they can lose money on infants, says Heidi Hagel Braid of First Children’s Finance, a Twin Cities-based nonprofit that helps child care providers learn how to run their in-home family child care like a business. Removing four-year-olds from the pool would simply worsen the situation.

The child care shortage hits families first. Jodi Maertens, a program officer focusing on child care at the Southwest Initiative Foundation in Hutchinson, knows this firsthand. Maertens was caught without care for her 11-month-old this summer when her child care provider made the decision to go back to school. Maertens found another provider who could take her child in September, so Maertens and her husband took days off and arranged babysitters to cover the month in between.

Maertens counts herself lucky, though, that it was only a month. For single parents with no one to fall back on or those who can’t get child care on a regular basis, like people working non-traditional shifts, it would be like this all the time.

“This is only my second week at it [without child care], and I’ve already fallen behind at work,” she says. “Every morning, it’s like, what’s the plan for today?”

Child care represents a significant cost in most families’ budgets, according to Child Care Aware of America. Those costs compete with other necessities like housing and food. Comparing median household incomes to average child care rates by county,[8] an average annual child care bill can represent anywhere from 10% to 17% of that county’s median household income. Center-based care tends to be even more expensive, ranging from 10% of median household income in Renville County to 27% in Hennepin County. The Minnesota Department of Employment and Economic Development’s Cost of Living tool shows how child care factors in with other household expenses.[9] Child care or lack of it can dictate many things, like whether a parent can accept a job offer and which one, whether they can work at all, where they live, and how far they commute.

The Minnesota Department of Human Services staff is tracking the child care shortage, interpreting the data they have to better understand the situation. But while they collect data from providers, they lack solid data on the family side, says Deb Swenson-Klatt, manager for the child development services division of DHS, which leaves them constrained in their ability to help find solutions.

Certain groups are especially hard hit

Low-income families, in particular single-parent families, struggle with child care. “They don’t have as much stability with their options,” says Tammy Filippi, early childhood specialist with the Initiative Foundation in Little Falls. The cost of child care eats up a larger percentage of their income (see table), limiting where parents can take their children, but in small towns with few providers, they may have little choice. The table below shows the difference in impact child care has on different levels of household income.

 

Statewide Family child care Accredited child care center
Average annual cost $8,033 $17,442
Median income, married couple $96,364 8% 18%
Median income, single mother $27,075 30% 64%
Median income, single father $41,283 19% 42%

Income data: U.S. Census 2014 estimates; Child care cost data: Child Care Aware of America, Minnesota 2015 fact sheet.

Low-income parents are also more likely to work multiple jobs and non-traditional shifts, for which child care is virtually non-existent. At that point, parents must turn to what’s known as FFN, their family, friends and neighbors.

The state’s Child Care Assistance Program (CCAP) helps low-income families pay for child care. Payments are made directly to providers on behalf of families. The problem is that program payments often don’t cover a provider’s full costs, says Barb Wagner, executive director of the Minnesota Licensed Family Child Care Association, Inc. Families are supposed to pay the difference, but they can’t always, or won’t. The provider is left trying to collect or taking a loss.

The percentage of different groups saying they feel they have to take whatever form of child care they can get (MN Dept. of Human Services, “Child Care Use in Minnesota: Report of the 2009 Statewide Household Child Care Survey.”).

Another group struggling with child care are families of children with special needs, who often require specialized services and extra attention.

“We hear from providers about this the most,” says Hagel Braid. Providers are seeking resources and training, especially anything that would strengthen the connection between child care and the special education resources of local school districts.

Different cultural groups look at child care differently as well. A 2009 survey by the Minnesota Department of Human Services found that nearly 60% of people of color said child care provided by a family member was “very important,” compared to 29% of all households.[10] Among immigrant families, mothers are more likely to stay home with the children, but when they do need child care, they look to family, friends and neighbors who understand their culture and language, says Hagel Braid.

There aren’t many bilingual child care programs yet, but communities are changing. Greater Minnesota’s many cities with large pockets of immigrants “should be positioning themselves to be vibrant communities,” Hagel Braid says.

“In the business of building brains…”

“As a society, we tend to overlook how children are being cared for in their first five years,” says Lynn Haglin, vice president of the Northland Foundation in Duluth and director of the foundation’s KIDS PLUS program.

Frameworks Institute’s research on Americans’ attitudes toward and understanding of early child development[11] found that we tend to look at children’s brains as little empty vessels to be filled up with information. Instead, it’s more like our brains at that age are being wired by our experiences, environment and relationships. From birth to age three, a baby’s brain makes up to 700 neuron connections a minute.[12] How they are wired early on will determine how a child progresses intellectually and emotionally the rest of his or her life.

With a shortage of child care or affordable child care, the fear among early childhood education professionals is that parents will be forced to turn to cheaper, lower-quality alternatives. Now with a shortage of providers, we need to make sure that what’s being offered out there is quality care, Haglin says.

Low-quality child care looks like groups of babies sitting in car seats all day and toddlers plopped in front of TVs for hours, day in and day out, says Haglin.

This type of supervision does nothing for a child’s brain development, which does nothing to prepare them for becoming adults, says Hagel Braid.

“They are the future workforce. Birth to five is the most important period for social and emotional development, and social and emotional development is what makes them good employees down the road,” Hagel Braid says.

Children receiving high-quality care, whether at home or from a provider, are far more likely to show up for kindergarten ready to learn. “If they’re not ready, it starts an achievement gap that’s incredibly hard to close later on,” says Hagel Braid.

What makes providing child care hard, she says, is that “child care providers are in charge of building brains, and they’re doing that without help or support because they’re privately owned businesses providing a public service.”

According to Haglin, however, being a licensed child care provider does not guarantee quality care.

“Licensing is only about basic safety, but parents think it’s about quality,” Haglin says. While licensors visit homes once a year to do important safety checks, they are not involved in curriculum or what children are doing all day.

To add that element of screening for quality, the state Department of Human Services and private partners introduced the Parent Aware Quality Rating and Improvement System to Minnesota in 2007 to help families locate quality child care and early education and to help providers improve their skills and knowledge. Parent Aware Star Ratings and other education services give parents tools and information to find quality programs. Higher Star Ratings indicate that providers are trained in best practices that prepare children for kindergarten. Local Child Care Aware agencies help providers participate in Parent Aware training.

The star rating system has been very helpful for providers, says Haglin, giving them new tools and strategies, and it can be a big morale booster for professionals who often feel undervalued. “They feel reinvigorated,” Haglin says.

The disconnect between expenses and income

The primary problem for child care providers, whether they offer in-home care or center-based care, is a fundamental gap between what it costs to run a child care program and what parents are willing or able to pay.

Ideally, a business owner sells a service or product at a price that covers the cost of producing that item, plus a little profit. At the same time, though, they can only charge a price the market will bear or else the market won’t buy. In the current market failure situation of child care, providers would charge rates that allow them to at least cover their costs, but many parents find it difficult to pay that much, especially in rural areas.

In some Twin Cities suburbs, where incomes are higher and children are plentiful, providers can make a reasonable income, says Barb Wagner. They can charge what they need to, and if a family can’t afford it, another family is willing to take—and pay for—that spot.

In rural areas, it is tougher for a provider to push that price up, Wagner says. Median household incomes are lower in rural areas (sometimes much lower), but the cost of providing child care isn’t necessarily lower.

For family child care providers, the largest portion of expenses, at 30%, goes toward facility costs such as home, phone, and utilities, says Hagel Braid. Another 22% goes toward administration costs such as licensing, training, supplies, curriculum, or accounting services. For child care centers, 70% of the cost of operation is in staff. Facility expenses take up another 20%; food, 5%; and everything else, another 5%.

Expense and frustration

Regulations keep children safe and hold providers accountable, but at hearings held by the Minnesota House Select Committee on Affordable Child Care in early 2016, providers repeatedly mentioned how regulations have become difficult to follow.[13]

“Child care is a highly regulated industry, and it should be,” says Hagel Braid, “but that comes with a price.”

In 2013, the Minnesota Legislature increased the number of annual training hours required for licensed providers from 8 to 16. This wasn’t an arbitrary decision. According to Minnesota DHS, “Minnesota’s focus on health and safety trainings is consistent with new training requirements being enacted throughout the country and federally.” New federal regulations require states to enact laws requiring licensed providers and providers who receive child care assistance payments to be trained in ten health and safety topics.

That’s a good thing, says Sherry Tiegs, who has over 30 years’ experience in child care and early childhood education in Morris. “It keeps providers up to date on the latest statistics and education in early childhood education and child development.”

For rural providers, however, getting in their required training can be a challenge. Rural Minnesota has a shortage of approved trainers, says Tiegs, who is an approved trainer herself. For providers, attending training can mean additional expense in gas and an overnight stay, and possibly closing for a day or two. Training sessions are also cancelled due to low numbers, which puts providers at risk of not getting in their required hours to stay licensed. Rural providers can take their classes online, but Internet access can also be an issue, say Tiegs.

Regulations also carefully control the number of children a family child care business can care for. They can be licensed for no more than ten children, and of those, no more than six can be under school age. Also, no more than three can be infants and/or toddlers, and of those, no more than two can be infants (less than 12 months old).[14] Keeping groups small is good, but it does inherently limit a provider’s income, which may be one reason why child care centers have been on the upswing. They have a staff, can handle larger numbers of children while reducing per-child overhead, and the owner can take days off without having to close down.

Child care centers aren’t easy to open in rural communities, though. Centers account for only 33% of child care capacity in Greater Minnesota and 67% in the Twin Cities. The cost of starting up and maintaining a center can be considerable, and smaller communities may not have the number of children needed to cover those costs. Expenses include staff, which are becoming increasingly hard to recruit, renting or purchasing space, and ongoing upkeep. Serving food at a center requires a restaurant-grade kitchen.

“It’s not just about opening a center but maintaining it,” Jost says.

Paperwork plays a role in the frustration as well. “Care for infants is especially at risk as the regulations have become so strict, providers are simply afraid to care for infants,” says Wagner of the Minnesota Licensed Family Child Care Association Inc.

Providers must collect intake forms, medical forms, immunization forms and more to accept children into their programs and keep track of crib checks and equipment checks.

“There are some providers that have chosen not to participate in the [Child and Adult Care Food Program], because they feel that for the amount of paperwork they do, the reimbursement they get is not worth the hassle,” says Wagner.

Inconsistency among county licensors is also a major headache, according to providers testifying before the House Committee on Affordable Child Care. County licensors, who enforce state regulations, are providers’ first and closest point of contact with the state, but licensors can have widely differing interpretations of those regulations, often catching providers by surprise.

“It has left many providers afraid to be in the business,” says Wagner.

Regulations are created by the state legislature but enforced by the Minnesota Department of Human Services. The department also supports delivery of much of the training available to providers in Minnesota through grants to organizations like First Children’s Finance and Child Care Aware agencies, but the programs need to be made more visible says DHS’s Swenson-Klatt. “We need to ensure [programs] are offered in the communities that need them most, especially in very rural communities.” This is where having only anecdotal information instead of fine, community-level data is a problem, says Swenson-Klatt. DHS’s resources are limited; they need to know where to focus them for best effect.

“We’re always looking at what modifications we can make in service delivery to remove barriers,” says Swenson-Klatt.

The challenge and potential for businesses and communities

At the same time that businesses are facing an unprecedented worker shortage,[15] the child care shortage is compounding the problem.

Reliable, quality child care in a community supports local business by giving parents child care they can count on. That in turn allows them to be undistracted and productive. Without adequate child care, local businesses are unable to recruit skilled workers and the workers they do have may be preoccupied with child care worries.

Child care is a top reason for absenteeism, and absenteeism hits the bottom line of every business in the form of lost productivity, the cost of bringing in temporary help, overtime for other workers asked to fill in, and the cost of finding and training a replacement if the parent quits.[16]

A sick child, a sick provider, or snow days are all reasons. In addition, parents who find their children’s current care inadequate and can’t find a suitable replacement may decide to quit work altogether to stay home.

Child care is such a desirable commodity now, in fact, that some Minnesota businesses are using it as a way to attract workers, especially younger workers. In manufacturing, one of Greater Minnesota’s strongest industries, a large percentage of baby boom-generation workers are nearing retirement. Rural manufacturers are having a hard time keeping up with growing demand for their products despite the fact the sector is paying $10,000 to $15,000 more than most other industries.[17]

Harmony Enterprises Inc. in Harmony, Minn., spent $500,000 to convert a factory next to its plant into a 10,000-square-foot child care center for 100 children. The manufacturer of recycling and waste management equipment was struggling to find employees. They saw offering child care as a way to stand out.[18]

According to company president Steve Cremer in a Star Tribune article, child care has been Harmony employees’ biggest issue. It causes stress when workers have to “‘leave mid-shift and drive 20-plus miles to collect kids when day-care arrangements fall through,’ he said.”

“‘Our day care will be most important for employee retention, but of course it will definitely help us with recruiting, too … It is just not easy to find people,’ Cremer said.”

Management at Gardonville Cooperative Telephone Association in Brandon, just up I-94 from Alexandria, came to a similar conclusion. In 2014, the co-op remodeled space in its old headquarters to provide care for children of employees and from the community.

In a local news article, CEO and general manager Dave Wolf challenged all business leaders to take a good look at child care as a benefit for employees. “A lot of our employees are two-income families and they’re young families. Child care is a very dynamic problem that’s shifting constantly.”[19]

First Children’s Finance has been working on ways to help towns come up with innovative community-based solutions, says Hagel Braid. The ideas have been big and small. Communities are using financial incentives; pairing business owners and providers to build sustainability; and eliminating some of the costs of training: in Stevens County, a dairy with good high-speed Internet service set up a room where providers could take online training, solving their problem of poor Internet service at home and having to travel long distances.

The Minnesota Initiative Foundations are also addressing this issue, working with Parent Aware and First Children’s Finance to help providers receive Parent Aware ratings by covering training costs and making training available locally.

First Children’s Finance has also been coordinating Greater Than MN, community planning projects that address the child care shortage. Providers, parents, educators, businesses, economic developers and local governments in Redwood, Itasca and Clay counties produced community action plans in 2015, and three more counties are currently going through the process, says Hagel Braid. In the plan, stakeholders identified the issues, their effects, and concrete steps for action going forward.[20]

Predicting the future

The population of zero to four year olds is projected to stay steady, right around 355,000, for the next fifty years, according to the Minnesota State Demographic Center.[21] The growth in the working-age population is expected to be similar, staying flat until around 2035, when it will begin to grow modestly. But even with no increase in child population, the steep downward trend in the number of licensed family child care providers promises no end to the shortage. That trend is simply market forces at work. For those child care providers getting out, the income they made did not offset the expense, time and effort they put into it.

But while the number of providers has dropped by one fourth in the last ten years, almost 10,000 licensed providers are still doing this vital job. Child care providers are transitioning from being considered glorified babysitters to being highly trained, dedicated professionals responsible for our future workforce and citizens. Those providers who are hanging on through these tough times, continuously improving their skills, and excelling at their jobs deserve to be treated as such.

What can be done to help them continue to provide quality child care, to convince others to take up this career, and to show them that they are a valued part of our society and economic system?

“It will not be a top-down or bottom-up solution,” says Nancy Jost. “If we don’t work on it as communities, we’ll have a hard time implementing anything. But without state policy, we won’t have lasting solutions. No one layer can figure it out on their own.”

Recommendations

  • Ensure that policies don’t depend on growth in child care centers to fix the shortage everywhere. Child care centers are very difficult to open and maintain in rural areas and therefore can’t be counted on as the sole solution.
  • Ensure that family child care providers are represented on committees and in other policy-making discussions, especially those that set regulations.Encourage state lawmakers to increase CCAP to a level that comes closer to covering providers’ costs.
  • Support the Minnesota Department of Human Services in their efforts to make it easier to be a child care provider in Greater Minnesota. This includes making training more accessible and more affordable through Child Care Aware, Parent Aware, and other organizations; and their ongoing work to make their website more user friendly.
  • Require that training for county licensors ensures they understand child care regulations, how to assist as well as enforce, and the importance of enforcing regulations consistently across the state.
  • Track and study child care options for under-served groups: children of immigrants, children with special needs, and children whose parents work nights and non-traditional shifts. More information will help with the search for solutions
  • Help with licensing costs or even offer free licensing. Such cost savings can mean the difference for a provider between staying in business or quitting.
  • Help spread the word. Local communities have been making a start of finding their own solutions, but only when they recognize there’s a problem.

 

 

[1] Frameworks Institute.

[2] U.S. Census.

[3] Minnesota Department of Human Services, FCC and CCC licenses and capacities 2006-2015.

[4]      Amanda Rohrer, “Low Income Workers in Minnesota,” September 2014.

[5] U.S. Department of Health and Human Services Poverty Guidelines.

[6]      Allen, LaRue and Bridget B. Kelly, editors, Transforming the Child Care Workforce for Children Birth through Age 8: A Unifying Foundation, 2015.

[7]      Minnesota Department of Human Services, “Child Care Workforce in Minnesota, Final Report.”

[8]      Median household incomes, U.S. Census Bureau 2014 estimates; Average weekly child care rates, July 2016, Child Care Aware.

[9] MN Department of Employment and Economic Development, Cost of Living tool.

[10] Minnesota Department of Human Services, “Child Care Use in Minnesota: Report of the 2009 Statewide Household Child Care Survey.”

[11] Frameworks Institute.

[12] Zerotothree.org.

[13] Minnesota House of Representatives, House Special Committee on Affordable Child Care.

[14] Minnesota Administrative Rules, 9502.0367 Child/Adult Ratios; Age Distribution Restrictions.

[15] Center for Rural Policy and Development, “The Coming Workforce Squeeze.”

[16] Forbes, “The Causes and Costs of Absenteeism in the Workplace.”

[17] Star Tribune, “Rural factories spend big on perks, even buy companies to find workers.”

[18] Star Tribune, “Rural factories spend big on perks, even buy companies to find workers.”

[19] Echo Press (Alexandria), “Child care crunch causing parents to scramble.” Nov. 15, 2015.

[20] GreaterthanMN.org, “Redwood County Community Solution Action Plan.”

[21] Minnesota State Demographic Center population projections.

RDL & Associates and Aronnax Public Strategies Agriculture Group

If your company or organization is giving consideration to enhancing your current efforts or developing a management plan for your policy and political capital, RDL & Associates would welcome the opportunity to assist you in developing a game plan for success.

A strategic and tactical communications and government relations plan allows for an organization to effectively hit the ground running at the federal, state and local levels of government and across business sectors.

The partnership between RDL & Associates and Aronnax Public Strategies (APS) works with state affiliates in 22 states, Puerto Rico and the United Kingdom.

With reauthorization of the Farm Bill approaching in 2018, discussions are currently underway in Washington and within State Capitols about what that bill should look like.  Coalitions are being formed, policies are being considered and strategic planning by stakeholders is well underway.

There will again be a broad range of issues under consideration, including (but not limited to); water quality regulations, commodity support programs, payment limits, biotechnology, conservation compliance, utilization of risk-management tools, federal dairy policy, agro terrorism, food safety, and nutrition programs.

In addition, policymakers will debate issues regarding business development and retention, transportation infrastructure, technology (including telecommunications), availability of credit, education, housing and health care as they develop agriculture policy and craft the next farm bill.

None of the above issues, however, will be considered in a vacuum because the agriculture policy playing field is extremely complex.  Which is why it is important to have representation at both the State and Federal level of government.

With over a quarter century of combined experience working within agriculture at both the State and Federal levels, RDL & Associates and APS provide a unique Federal and State government affairs service that is unparalleled.  This innovative services provides agricultural clients with the full range of Federal and State lobbying under a single, cost-effective contract.

Developing such an effort does not have to be cost-prohibitive.  The fee structure for our services can be negotiated so that it best reflects the work expected of RDL & Associates so that it coincides with your organization’s internal budget.

If RDL & Associates might be helpful in developing a government relations effort for your organization, we would welcome the opportunity to speak with you and your colleagues.

We thank you in advance for your consideration.

Dave Ladd, President
RDL & Associates, LLC
(651) 247-5458 – mobile
e-mail:       daveladd66@gmail.com
LinkedIn:   http://www.linkedin.com/pub/dave-ladd/0/b87/11
Blog:         https://rdlassociates.wordpress.com/

Professional Biography: https://www.dropbox.com/s/1sw541sw5kwy9dz/Bio%20(6)%20-%20Dave%20Ladd.pdf?dl=0

 

 

Working Capital Buffers Gone at End of 2016 (via Farmdoc Daily)

Gary Schnitkey

Department of Agricultural and Consumer Economics
University of Illinois

farmdoc daily (6):178


Recommended citation format: Schnitkey, G. “Working Capital Buffers Gone at End of 2016.” farmdoc daily (6):178, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, September 20, 2016.

Permalink: http://farmdocdaily.illinois.edu/2016/09/working-capital-buffers-gone-at-end-of-2016.html


As was forecast, working capital on farms decreased during 2015 (see farmdoc daily, October 6, 2015). Given 2016 income prospects, further decreases in working capital should be expected. At the end of 2016, most of the working capital reserves built during high-income years from 2007 to 2013 will be gone. Working capital levels will again be at levels comparable to 1996 through 2006. In 2015 and 2016, working capital reserves were used to fund cash flow shortfalls coming from operations. If prices remain low through 2017, means other than reducing working capital likely will be needed to address cash shortfalls.

Working Capital over Time

Figure 1 shows current ratios averaged for Illinois farms enrolled in Illinois Farm Business Farm Management (FBFM) who completed usable balance sheets. A current ratio equals current assets divided by current liabilities. Current assets include cash and cash equivalents; crop, feed, and market livestock inventories; and prepaid expenses. Current liabilities include operating loans; current portions of longer-term debt; accounts payable; and accrued items such as income taxes. A current ratio measures the farm’s ability to pay back short-term liabilities with short-term assets. Ratios below 1.00 suggest that a firm will be unable to pay back its obligations without resorting to financial restructuring. Having additional abilities to meet obligations, as indicated by having higher current ratios, is desired. A textbook benchmark for an acceptable current ratio is something above 2.00.

fdd200916_fig1.jpg

From 1996 to 2006, low profit margins existed on most Illinois farms, and the current ratio averaged 1.76 (see Figure 1). Between 2006 through 2012, the average current ratio increased, reaching a high of 2.87 at the end of 2012 (see Figure 1). From the 2012 high, the current ratio decreased: 2.49 at the end of 2013, 2.28 in 2014 and 2.05 in 2015.

Changes in these current ratios are highly correlated to net farm incomes (see Figure 2). During the period between 1996 through 2002, net income averaged $39,000 per farm on grain farms enrolled in FBFM. During this same period, the current ratio averaged 1.72. Net incomes were higher in 2008 to 2012, with increasing net incomes from 2010 through 2012. The highest net income of $298,000 occurred in 2012, the same year that the current ratio hit its maximum of 2.87. Since 2012, incomes have decreased and current ratios have decreased as well. The correlation coefficient between average net farm income and the current ratio is .88.

fdd200916_fig2.jpg

Net income on grain farms enrolled in FBFM averaged $500 per farm in 2015. It is reasonable to expect low net farm incomes in 2016, likely somewhere near $10,000 per farm. Net incomes at this level would result in another decline in the current ratio. If the decrease was the same as last year, the current ratio will be 1.81 at the end of 2016, near the 1.76 level that occurred between 1996 through 2006.

Components of Working Capital

Evaluating the specific components causing working capital to change over time is useful. Figure 3 shows major current asset categories of the current ratio. Decreases in current assets result in lower current ratios. Figure 4 shows the major liability categories of the current ratio. Increases in current liabilities reduce the current ratio.

fdd200916_fig3.jpg

Somewhat surprisingly, cash balances have remained relatively constant in recent years: $242 per acre in 2014 and $255 per acre in 2015. On average, farmers have not reduced cash. Rather working capital changes have occurred elsewhere.

Current ratio decreases have come from two major categories: 1) decreases in crop inventories and 2) increases in operating loans. Crop inventories averaged $628 per acre at the end of 2014 and $539 per acre at the end of 2015, a decrease of 14%. Some, but not all of this decrease occurs because of lower prices used to value crop inventories. In valuing inventories, FBFM used corn prices of $3.75 at the end of 2014 and $3.60 per bushel at the end of 2015, a 4% decrease. Soybean prices for inventory purposes were $9.81 at the end of 2014 and $8.60 at the end of 2015, a 10% decrease. Both the 4% corn price decrease and 10% soybean price decrease were less than the 14% crop inventory decrease, indicating that farmers had lower bushels in grain inventories at the end of 2015 as compared to the beginning of 2015. Hence, the crop inventory decline is not solely due to prices, but also because physical inventories have decreased.

Operating note balances increased from $303 per acre in 2014 to $315 per acre in 2015. The other components of current liabilities have remained relatively steady.

fdd200916_fig4.jpg

So far, much of the financial adjustments occurring on Illinois grain farms have occurred in two areas: lower grain inventories and increasing operating notes.

Variations

In the sections above, averages for working capital have been presented. There will be large variations in working capital across farms as previous decisions will impact current levels of working capital. Moreover, some of these differences are structural. For example, current ratios tend to decrease with less farmland owned. For example, farms that own less than 10% of their land had a current ratio of 1.78 at the end of 2015. The 1.78 ratio compares to a 2.33 a ratio for farms that own between 26 and 50% of their farmland. More detail on how financial ratios vary by farm type is available in the Financial Benchmark Section of farmdoc.

Commentary

Overall, reductions in working capital do not necessarily signal a time of financial stress in agriculture. Incomes will be low in 2016; however, most farmers will have the financial reserves to deal with cash shortfalls. Many farmers will again reduce working capital.

However, working capital reductions could present issues in the future. After the end of 2016, many farms will not have large working capital reserves compared to historical levels. If 2017 is a low-income year, cash shortfalls will again occur. Working capital reserves may no longer be large enough to cover cash shortfalls. Farmers may have to use other methods of meeting cash shortfalls including 1) refinancing short-term debt into longer maturity debt and 2) liquidating assets. Lenders may seek FSA guarantees for operations that are becoming financially questionable.

A gauge of whether low incomes will continue are commodity prices. As long as corn prices remain below $4.00, working capital and financial situation on grain farms in the Midwest can be expected to deteriorate. More rapid deteriorations will occur with lower commodity prices. Large cash shortfalls will occur on most farms when corn prices are $3.50 per bushel or below.

How many years of prices below $4.00 is an open question. At this point, it seems reasonable to expect low incomes into 2017 as bid prices for corn in the fall of 2017 are near $3.50 per bushel. Hence, continuing cuts in non-land costs and rents are in order.

References

farmdoc. “Financial Benchmarks.” Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, accessed September 20, 2016.

Schnitkey, G. “Significant Reductions in Working Capital Likely in 2015 on Grain Farms.” farmdoc daily (5):184, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, October 6, 2015.

US initiates WTO trade complaint on China’s corn, wheat, rice subsidies (via Agri-Pulse Communications)

U.S. Trade Representative Michael Froman informed China today that the U.S. has launched a formal complaint at the World Trade Organization over China’s price supports for corn, wheat and rice, saying they distort world markets and are costing U.S. farmers hundreds of millions of dollars.

At a press conference in Washington, Froman said China’s breaches of WTO rules are massive. With Agriculture Secretary Tom Vilsack at his side, Froman said that China exceeded the WTO maximum for domestic price supports for the three commodities by $100 billion in 2015.

In a statement, President Barack Obama endorsed the USTR action. “China’s government has set prices for wheat, corn, and rice well above market levels, which has led to unfair government subsidies that are in violation of WTO rules,” Obama said. “These unfairly distorted prices on important crops lead to overproduction in China and disadvantage American farmers who export these same crops around the world.”

Alan Tracy, president of the U.S. Wheat Associates, said China routinely guarantees its farmers more than $10 per bushel for their wheat and that artificially pushes up production, distorting the international market and robbing U.S. exporters of sales. U.S. farmers received less than half of that for their wheat last year. Iowa state researchers have estimated U.S. wheat exporters lost roughly $700 million in 2015 because of China’s domestic support programs that far exceed levels allowed for in the WTO.

“Wheat production subsidies in China and other advanced developing countries are the single biggest policy issue affecting our farm gate prices and global trade flows,” said Tracy. “In taking this step, USTR and USDA are demonstrating that trade enforcement can ensure that our many trade agreements and a pro-trade agenda really work for American farmers.” Sen. Heidi Heitkamp, D-N.D., was one of a half-dozen lawmakers at the USTR announcement today and she applauded the complaint.

“On top of challenging commodity prices, North Dakota farmers shouldn’t have to deal with China breaching trade commitments and making it tougher for us to get market value for our crops,” she said. “When countries cheat on trade agreements and distort global markets, we need to hold them accountable, and that’s what the U.S. Trade Representative and the Secretary of Agriculture are doing today. Addressing Chinese over-subsidization can help support the price of U.S. wheat and corn, and that’s good news for North Dakota farmers.”

All WTO members are required to submit totals for domestic crop support yearly to the WTO, Froman said, but China has not done that in six years.

The U.S. has confronted China multiple times over the crop price subsidies, U.S. trade officials said today, but the country was “unresponsive.”

U.S. officials say they will do their best to resolve the complaint with China through the WTO consultation process over the coming months, but they stressed the government is prepared to litigate. China is required to sit down with the U.S. within 60 days to address the complaint, but the officials said they hope to start next month when representatives of both countries are expected to meet in Geneva.

The complaints against China are numerous – beyond the price supports, China is believed to be subsidizing everything from the costs of seeds to fertilizer for its farmers – but the country is still the largest customer for U.S. farm commodities.

“Through tariff cuts and the removal of other trade barriers, China has gone from a $2-billion-a-year market for U.S. agricultural products to a $20-billion-plus market,” Vilsack said today. “But we could be doing much better, particularly if our grain exports could compete in China on a level playing field.”

House Agriculture Committee Chairman Michael Conaway said today he appreciated the USTR complaint against China, but also stressed he’d like to see further action, specifically on cotton.

“I am very hopeful that beyond the challenges announced today, that the U.S. government will also vigorously pursue a case against China concerning its cotton policy which has wreaked havoc on our domestic producers,” said Conaway, who hails from Texas, the biggest U.S. cotton-producing state. “Absent this, I fear that our domestic cotton production and all that it means to our nation’s economy will be lost in much the same way we forfeited our textile industry, once the largest manufacturing sector of our economy.”

China kept domestic prices for cotton artificially inflated for years, a policy that attracted imports and helped create massive stockpiles in the country. Now China is trying to offload those stockpiles on the global market and that’s pushing down international prices.

Today’s press conference, which was held at USDA headquarters, was primarily about the trade complaint, but Froman and others used the platform to call for Congress to ratify the Trans-Pacific Partnership, a massive trade deal involving the U.S., Japan, and 10 other Pacific Rim countries.

China, which is not included in the TPP, isn’t just breaking WTO commitments, Obama said. The country is also working to forge its own multilateral trade agreement and take the lead in the region.

“It’s all the more important that we finalize TPP soon because as we speak, China is negotiating a trade deal of its own – one that would carve up the growing Asia-Pacific markets at our expense, risking American jobs, businesses, and goods,” Obama said. “Unless we act now to set our own high standards, the fast-growing Asia-Pacific (region) will be forced to play by lower-standard rules that we didn’t set.  We can’t let that happen.”

Issue Update: Prospects for a Continuing Resolution

With reauthorization of the Farm Bill approaching in 2018, discussions are currently underway in Washington and within State Capitols about what that bill should look like.  Coalitions are being formed, policies are being considered and strategic planning by stakeholders is well underway.

Dave Ladd, President of RDL & Associates, was recently a guest on the Linder Farm Network to provide a brief overview of the congressional agenda and prospects for a “stop gap” spending measure.

The update can be accessed here: https://soundcloud.com/rdl-associates/dave-ladd-one

If your company or organization is giving consideration to enhancing your current efforts or developing a management plan for your policy and political capital, RDL & Associates would welcome the opportunity to assist you in developing a game plan for success.

For additional information and updates, please contact Dave Ladd at (651) 247-5458 or via e-mail at daveladd66@gmail.com.