Dave Ladd, President of RDL & Associates, recently spoke with Linda Brekke of the Linder Farm Network regarding the regulatory “freeze” implemented by the Trump Administration, trade agreements, and United States Department of Agriculture (USDA) nominee Governor Sonny Perdue.
For additional information, please contact RDL & Associates at (651) 247-5458 or daveladd66@gmail.com.
The segments can be accessed as follows:
We often hear phrases such as “protect your working capital”, or “watch your liquidity”, or “cash is king”, when referring to short-term financial analysis of a farm business. All of these terms generally refer to the “working capital” of a farm business. A significant decline in working capital in a farm operation can lead to a rapid deterioration of the overall financial outlook for the entire farm business and its owners.
The simple definition of “working capital” is “total current assets” minus “total current liabilities”. While that definition sounds quite simple, getting true and accurate working capital data can be much more complex in many situations. The “current assets” usually include available cash from bank accounts, accounts receivable, grain and livestock inventories, prepaid crop and livestock expenses, hedging account balances, and any other short-term assets. Accounts receivable could include crop insurance or government farm program payments, deferred sales payments on grain or livestock that has already been delivered, and money owed to a farm for custom or contract work.
The “current liabilities” include all accounts payable, unpaid taxes due, any crop input loans with Coops or seed companies, farm operating loan principal balance, and accrued interest on all loans. The current liabilities also include the amount of loan principal payments due in the next 12 months (not the entire principal balance) on all term loans and real estate loans. In the case of grain that has been placed under CCC Loan with the Farm Service Agency (FSA), either the entire value of the grain should be listed as an asset and the loan amount as a liability, or just the estimated net value of the grain should be listed as an asset.
A financial ratio often used to express the level of working capital is the “current ratio”, which is simply the “current assets” divided by the “current liabilities”. A current ratio of 1.7 or higher in a farm operation is usually considered quite solid, while a current ratio below 1.2 is usually a warning sign of potential short-term financial challenges or cash flow difficulties in the farm operation. If the farm current ratio drops below 1.0, it likely means that there could be difficulty in paying all accounts payable at year-end, as well as repaying the entire principal balance on the farm operating loan for the previous year. In more serious situations, there could also be difficulty in paying all required loan payments on term loans and real estate loans. Ag lenders pay close attention to these trends.
Another ratio that many farm financial advisors and ag lenders follow very closely is the level of “working capital to gross revenue” in a farm operation, which more accurately reflects the liquidity needs based on the size of a farm operation. That ratio divides the calculated working capital for the farm operation by the annual gross revenue of the farm business. For example, a farm operation with a calculated working capital of $200,000, and an annual gross revenue of $400,000, would have a ratio of 50 percent, which would be quite strong. However, if a farm operation had a gross revenue $2 million with $200,000 working capital, the ratio would be only 10 percent, which could be a financial concern if not addressed.
A “working capital to gross revenue ratio” of 30 percent or higher for crop farms, and 20 percent or higher for livestock farms, would be considered as fairly strong. If the ratio drops below 10 percent, it is usually an indicator of some financial stress in the farm business, which may require some financial restructuring. If this situation occurs, it is best for farm operators to consult with their ag lender to find some workable solutions.
Based on the Farm Business Management (FBM) records for over 1,200 Southern Minnesota farms, the average “working capital to gross revenue” in 2015 was about 27 percent, with crop farms averaging over 38 percent, with livestock farms averaging 16-17 percent. The data also showed that farm operations that were in the bottom 20 percent of net income in 2015 had an average ratio of just under 12 percent, while farm operations in the top 20 percent of net farm income had an average ratio of nearly 40 percent.
As we end 2016 and enter 2017, the level of working capital will likely be a concern for an increasing number of farm operations. This is due large variations in 2016 crop yields and year-end grain inventories, lower values for livestock on hand, as well as increasing levels of accounts payable and farm operating loans at the end of 2016. Farm operators in portions of South Central Minnesota and other areas of the Upper Midwest that incurred reduced crop yields last year, due to the excessive rainfall and drown-out damage, are especially feeling some added financial stress from the decline in working capital, as compared to a year earlier.
Once a farm operator has identified the need for improvement in working capital in the operation, they should consult with their ag lender and farm business management advisors to develop a workable plan. Some possible ways to improve the working capital in a farm operation include :
Most working capital shortfalls can be worked out if they are identified early, while there are still some manageable solutions available.
Kent Thiesse is Farm Management Analyst and Vice President for MinnStar Bank.
The nation’s soybean farmers expressed significant concern Monday, following an executive order from President Donald Trump that withdraws the United States from the 12-nation Trans-Pacific Partnership (TPP). American Soybean Association (ASA) President Ron Moore pointed out the high stakes for soybean farmers, and urged the Trump Administration to immediately announce how it intends to engage and expand market access in the Asia-Pacific region.
“Trade is something soybean farmers take very seriously. We export more than half the soy we grow here in the United States, and still more in the form of meat and other products that are produced with our meal and oil,” said Moore, who farms in Roseville, Ill. “The TPP held great promise for us, and has been a key priority for several years now. We’re very disappointed to see the withdrawal today.”
Soybeans are the nation’s largest agricultural export, and markets in Southeast Asia and Latin America continue to grow in their potential as buyers of U.S. soy. The biggest beneficiary from TPP, however, was the American livestock industry–in the form of increased meat and dairy exports–which represents the largest domestic market for soybean meal.
The TPP represents 40 percent of the world’s gross domestic product (GDP), and according to the Peterson Institute, would have increased overall U.S. exports by $357 billion by 2030. Specifically for U.S. farmers, TPP would have increased annual net farm income by $4.4 billion according to the American Farm Bureau Federation. Additionally, TPP was the first regional trade agreement to address the need to coordinate international policy on trade in the products of agricultural biotechnology, a benefit that ASA will push to see in any future agreements with TPP partner nations.
“Moving forward, we expect to see a plan in place as soon as possible to engage the TPP partner nations and capture the value that we lose with the withdrawal today. With net farm income down by over 40 percent from levels just a few years ago, we need trade deals with the Asia-Pacific countries to make up for the $4.4 billion in annual net farm income being lost by farmers from not moving forward with the TPP. Also, we expect a seat at the table to help ensure these agreements in whatever form they take are crafted to capture their full value for soybean farmers,” added Moore. “Trade is too important for us to support anything less.”
Local economies and employment levels are more sensitive to economic trends that have a pronounced effect on their leading industries. For example, trends in agricultural prices have a disproportionate impact in farming-dependent counties, which accounted for nearly 20 percent of all rural counties and 6 percent of the rural population in 2015. The boom in U.S. oil and natural gas production increased employment in many mining-dependent rural counties; more recently, lower oil and gas prices have led to reduced oil exploration and economic activity in these counties. Meanwhile, the decline in manufacturing employment has particularly affected manufacturing-dependent counties, which accounted for about 18 percent of rural counties and 23 percent of the rural population. This chart appears in the ERS report Rural America at a Glance, 2016 Edition, released November 2016.
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Dave Ladd, President of RDL & Associates, recently spoke with Linda Brekke of the Linder Farm Network regarding speculation as to who will be the Secretary of Agriculture in the Trump Administration, highlights from the Senate confirmation hearing of Rex Tillerson to be Secretary of State and healthcare.
The segments can be accessed as follows:
USDA (1:09 in length)
Senate Confirmation Hearing of Rex Tillerson (1:45 in length)
Healthcare (1:19 in length)
Big-ticket issues facing Congress could affect Farm Bill timing
There are more questions than answers about the details and timing of the next farm bill debate, two key staffers for the House and Senate agriculture committees told an overflow audience of farmers at the American Farm Bureau Federation’s national conference here Sunday.
Congress faces a wave of big-ticket issues in the coming year. The repeal and replacement of Obamacare, confirmation hearings for incoming President-elect Donald Trump’s nominees, and an expanding federal deficit all loom over exactly how the next farm policy debate will ensue.
With the agriculture economy on the ropes, Jacqlyn Schneider, minority deputy chief of staff on the Senate side, said farmers will not be forgotten.
“It doesn’t mean the farm bill will be neglected,” she said.
“We need to start examining policies now and make sure we get them right. We also have child nutrition programs. We have big question marks on how the year will go.”
Schneider said the new administration’s position on farm programs remains a mystery as Trump has yet to name his agriculture secretary nominee. What’s more, Schneider said it’s not yet known whether the Trump administration will offer up its own farm bill legislation. That was the case with the George W. Bush administration.
Bart Fischer, chief economist for the House Agriculture Committee, said Congress will have its work cut out on trying to somehow put together a farm bill.
“The biggest hurdle we face is all the other stuff going on in D.C.,” he said.
“We don’t know who the agriculture secretary will be, Obamacare repeal and replace. We don’t know how it will happen, but it will take up legislative time… The big picture with the budget is we owe $19 trillion and that dominated the last farm bill cycle. It will continue to hang over everything we do. Ag is not on the list of things driving the budget.”
Crop Insurance
While federal dollars spent on crop insurance may spark debate in Washington again, Fischer said the reality is the net interest on the debt alone is 40 times what is spent on crop insurance.
Fischer said it is “baloney” that cutting the crop insurance program would be an effective way to reduce the deficit.
“With SNAP (Supplemental Nutrition Assistance Program) included, we’re only 2% of the budget,” he said.
The 2014 farm bill contributed $23 billion in cuts to the deficit. Three years later, Fischer said, the cuts made in the farm bill are saving three times more than they were projected to save. In addition, he said, the SNAP program has come in under budget.
“The job we’re doing on the ag committees is defensible,” Fischer said.
With net farm income down 46% since 2013, he said last year Congress held seven hearings focused on the state of the agriculture economy in preparation for a farm bill debate. The last time farmers experienced such a drop in net income was during the Great Depression, he said.
“What happens going forward we know we need a robust safety net in place,” Fischer said. “In ’14 times were really good. We need a farm bill because times are what they are now.”
Farm Bill Issues
There are three issues the next farm bill will need to address, Fischer said.
Cotton may need a better safety net than the 2014 farm bill’s Stacked Income Protection Plan that offers some revenue insurance, he said. The National Cotton Council has said it will continue to push for cotton seed to be designated as oilseed. This would allow cotton to be a covered commodity under the Price Loss Program.
“Based on current price there is a piece of the safety net (cotton) is not eligible,” Fischer said. “We want to get cotton back in the farm bill.”
In dairy, Fischer said, Congress may make an adjustment to the feed factor in the Margin Protection Program. Premiums for MPP are based on futures prices and change with milk and feed prices. He said lawmakers currently are in a listening phase to find solutions to improve the program. The MPP has worked for some dairy farmers and not so well for others.
Fischer said Congress may look at adjustments to the Agricultural Risk Coverage, or ARC, somehow addressing payment variability coming as a result of variability in yields.
Before the holiday break, Congress passed budget appropriations for fiscal year 2017 through April 28. Appropriations for the remainder of 2017 will need to be completed, Fischer said, as well as a 2018 budget and appropriations.
In addition, Fischer said Congress will have to reauthorize Commodity Futures Trading Commission funds. He said the House is expected to move a CFTC bill this week.
Though trade typically is not part of a farm bill debate, he said “there is some concern with the anti-trade talk” coming from the next administration.
In particular, Fischer said there continues to be concern other countries are not following the World Trade Organization rules. He said it is good the Obama administration is challenging China on its minimum support policies on corn, rice and wheat.
According to the U.S. Trade Representative, China has exceeded its 8% subsidy allowance by more than $100 billion in one year.
“That’s more than we’ll spend on the entire U.S. crop system,” Fischer said. “We think the time has come to challenge what they do.”
When it comes to regulations, he said Congress will look at what went into effect in the past 60 days and still may be subject to the Congressional Review Act. The House has already voted to move such legislation.
Todd Neeley, DTN Staff reporter
Minimum wages will increase in 20 states at the start of the year, a shift that will lift pay for millions of individuals and shed light on a long-running debate about whether mandated pay increases at the bottom do more harm or good for workers.
In Massachusetts, the minimum wage will rise $1, to $11 an hour, a change that affects about 291,000 workers. In California, the minimum goes up 50 cents, to $10.50 an hour, boosting pay for 1.7 million individuals.
Wages are also going up in many Republican-led states, where politicians have traditionally been skeptical of the benefits of minimum-wage increases.
In Arizona, one out of every nine workers are slated to receive a wage increase—a move businesses are challenging in court. So will tens of thousands of workers in Arkansas, Michigan and Ohio—all states that backed Republican President-elect Donald Trump in November.
“Some of what Trump tapped into was people wanting to be paid more,” said David Cooper, analyst at the Economic Policy Institute, a left-leaning think tank. “Voting for a minimum-wage increase is one of the ways to make that happen for a lot people.”
In all, about 4.4 million low-wage workers across the country are slated to receive a raise because they earn less than the new minimum in their respective states, according to EPI.
Economists and policy makers are of two views on the costs and benefits of minimum-wage increases. While the policy puts more money in the pockets of low-wage workers, it also gives employers less incentive to add to their payrolls, leaving some workers behind.
A 2014 study from the nonpartisan Congressional Budget Office found raising the federal minimum wage to $10.10 an hour would reduce job creation by 500,000 over two years. At the same time, the report estimated that the increase in the federal minimum wage would raise the pay of 16.5 million workers who kept their jobs.
Jorel Ware, a fast-food worker in New York and activist for the FightFor15 campaign, will see his hourly wage increase by $1.50—to $12 an hour—to start the year, under a new state law that requires fast-food workers in the city to earn elevated pay. The boost will mean no longer choosing between buying groceries and paying rent, he said.
“I’d like to have a family and kids, but let’s be realistic, I can’t afford to survive on my own,” 35-year-old Mr. Ware, who lives in the Bronx, said. With the raise, “maybe I’ll be able to step up and ask a girl out on a date.”
New York state lawmakers approved a measure in 2016 setting a $15-an-hour minimum wage in New York City by 2019, and putting the rest of the state on a path to eventually reach that level. Separately, the state established a fast-food wage board, which set the $12-an-hour minimum wage in 2017 for that industry’s workers.
Arizona has become one of many other important laboratories for the shifting politics and economics of minimum-wage increases. Mr. Trump and Republican Sen. John McCain won their respective races in the state, but a larger share of the electorate, 58%, voted to raise the Grand Canyon State’s minimum wage to $12 an hour by 2020.
The Arizona Chamber of Commerce and Industry has challenged the law in court. On Thursday, the state’s highest court said it would not stop the raise from going into effect on Sunday, after a lower court rejected a motion for a preliminary injunction on Dec. 21. The court will decide whether to consider the case in February. The organization argues that the increase runs afoul of other laws because it would require the state to pay certain contractors more for their services.
Arizona’s $1.95 increase on Jan. 1, to $10 an hour, will be the biggest jump among the 20 states and one of the largest one-time increases ever enacted. Almost 12% of the state’s workforce will receive a raise. Arizona, home to many tourism and service-sector workers, has a larger share of low-wage workers than coastal states such as California and Massachusetts, where minimum-wage increases have been the norm for several years.
Thomas Grady, a 47-year-old operation manager at a fabrication shop in Scottsdale, Ariz., was among those supporting both Mr. Trump and a minimum-wage increase. He said the pay increase means individuals who haven’t attended college could earn enough to live on their own.
Mr. Trump will “open up jobs on the infrastructure side of things—building bridges, walls, roads,” he said. “Entry-level fast-food workers will be able to step up into those better-paying jobs, and then you’d see others without work fill the void in the entry-level jobs.”
Mr. Trump talked sparingly about the minimum wage on the campaign trail. At a July press conference, he said he could support a $10 an hour minimum, a departure from his stance during the Republican primary, when he said workers’ wages were “too high.”
A spokesman for the president-elect’s transition team didn’t respond to an inquiry.
Earlier this month, Mr. Trump tapped Andy Puzder, chief executive of CKE Restaurants Holdings Inc., the parent company of the Carl’s Jr. and Hardee’s burger chains, to be labor secretary. Mr. Puzder, a vocal advocate for cutting back regulations he says have stifled growth in the restaurant industry, has argued against raising the federal minimum wage higher than $9 an hour.
The federal minimum wage has remained $7.25 an hour since 2009.
Most Republicans in Congress have resisted a federal minimum-wage increase and have blocked Democrats’ efforts to raise the rate. Republican governors in Oklahoma, Alabama and elsewhere also have acted to prevent pay floors from rising in their states.
The GOP lawmakers and governors argue that making labor more expensive will encourage businesses to invest in automation that eliminates jobs, send work to lower-cost countries and dissuade firms from expanding because higher payroll costs trim profit margins.
“The minimum wage is not a great tool for helping those at the bottom,” said Ben Gitis, director of labor market policy at the American Action Forum, a right-leaning think tank. “The people who end up losing their jobs are the most vulnerable in the labor market.”
AAF estimates that nearly 300,000 fewer jobs will be created during the next five years in four states—Arizona, Colorado, Maine, Washington—where voters approved phased minimum-wage increases to at least $12 an hour in November.
Twenty-one states follow the federal-minimum wage. More than half of the 29 others automatically adjust their minimum wage annually to keep pace with inflation. In the remaining states, a law must be passed to raise the pay floor. And several cities, including Chicago, Los Angeles and Seattle, have set minimum wages above state levels.
Wage increases caused Swampscott, Mass., candy maker Bacci Chocolate Design Inc., parent of the CB Stuffer brand, to sell its retail store, which employed about five part-time workers, in 2015 and invest about $50,000 in equipment to automate routine tasks at its production facility, according to owner Erin Calvo-Bacci.
“It’s very hard to find a worker off the street that has the skills to command an $11 or $12 wage,” said Ms. Calvo-Bacci. “At that rate we can’t afford to be patient with someone who is less productive.”
Farmers and the rest of rural America were key to putting Donald Trump into the White House, energized by his attacks on overregulation and promises of tax reform. Veteran farm-policy hands say regulatory relief will be the new administration’s first order of business for agriculture.
“President Trump is not shy,” says Chuck Conner, a prominent member of an ag advisory committee to the Trump campaign and a former deputy agriculture secretary, in forecasting a forceful chief executive who conveys regulatory reform for rural America. “President Trump will drive the agenda of his cabinet.”
Ahead of the inauguration on January 20, the Trump transition team says, “We will eliminate the highly invasive Waters of the United States rule” known as WOTUS. Those are welcome words for farm groups, who spearheaded the fight against the EPA rule, which has been tied up in court since it was issued in June 2015. Dale Moore of the American Farm Bureau Federation says overregulation saps farmers’ bottom lines.
With his cabinet nominations, Trump assures a conservative turn in federal policy, arguably the greatest shift in direction since President Reagan broke the hold of New Deal-era philosophy on government operations in the 1980s.
Trump selected Oklahoma attorney general Scott Pruitt, who sued to block WOTUS, to run EPA; former Governor Rick Perry of Texas, the number 1 cattle and oil state, for energy secretary; and Representative Ryan Zinke of Montana, a supporter of an all-of-the-above approach to energy independence, to head the Interior Department, the largest federal land supervisor, with 416 million acres in its charge. The nominee for Labor secretary, Andy Puzder, “will be a key leader” in renegotiation of NAFTA and the Trans-Pacific Partnership trade pact, says Trump spokesperson Sean Spicer.
Biofuel supporters are worried. Pruitt and Perry have opposed the Renewable Fuels Standard. Iowa Governor Terry Branstad, Trump’s choice for U.S. ambassador to China, said at a Des Moines news conference that Trump, an ethanol backer, would call the shots. “The first thing Trump told me is, ‘Don’t worry about him (Pruitt). He’s going to be for ethanol.’ ” Iowa Senator Charles Grassley, a longtime ethanol backer, says on the Internet, “I intend to grill EPA director designee Pruitt” and Perry to make sure they’ll support ethanol.
Presidents usually start their terms with few appointees in place. Their cabinet members are usually confirmed by the Senate by late January but not the hundreds of senior and midlevel policy-makers. Executive actions such as changes in regulation are easier and quicker to achieve than debating policy with Congress. Lawmaking can consume months.
Moore of the Farm Bureau has rattled off a half-dozen areas where the Trump administration could provide regulatory relief in its first months in office: ditching WOTUS, relaxing restrictions on land use under the Endangered Species Act, “the whole suite of federal land issues,” including limits on livestock grazing on federal land, the so-called GIPSA rule on livestock marketing, proposed USDA rules on treatment of livestock on organic farms, and implementation of the GMO disclosure law enacted in July. Farm groups have claimed a victory since the GMO law preempts state labeling but mandates disclosure of GMO ingredients in food.
“We want something that will work,” Moore says, pointing to the possibility of rules that derail food-industry networks already in operation for disclosure. The GMO law allows use of a symbol, a bar code, or wording on the package.
Trump’s victory seems certain to quash a consumer group request to USDA for a cancer warning on packages of bacon, ham, hot dogs, and other processed red meat and poultry. “We’re used to taking the long view,” says the Center for Science in the Public Interest. Livestock producers and the meat industry contest a UN agency conclusion that processed meats can cause cancer.
Republican senators such as John Thune of South Dakota, a Finance Committee member, say conditions may be ripe for repeal of the estate tax this year as part of an overall tax reform bill. At present, the tax applies to estates worth more than $5.45 million.
During a postelection panel discussion, Conner, head of the National Council of Farmer Cooperatives, said Trump’s victory put the kibosh on an environmentalist drive for tougher conservation compliance rules in the next farm bill. “Those new regulations will not happen,” he said. Scott Faber of the Environmental Working Group said incentives for voluntary control of farm runoff were insufficient. He tenaciously repeated, “Nobody voted for dirty water.”
Preliminary hearings on the new farm bill are likely by spring, says Moore, but the target remains for enactment by fall 2018, when current law expires. “Everything is up in the air,” says Joshua Sewell of Taxpayers for Common Sense, which wants a robust review of the federal safety net. “There’s a real danger of spiking the football” and being overly generous because of rural America’s role in the election. Anne MacMillan, a former deputy USDA chief of staff now working at a consulting company, says, “I think you’ll see a very similar farm bill in 2018 to what we have now.”
By the time the Senate and House Agriculture committees draft the farm bill, the Trump honeymoon probably will be over. It may not matter. Congress traditionally takes the lead on farm bills and relegates the administration to an advisory role. Regional alliances – North vs. South or corn and soybeans vs. cotton and rice – matter more.
“Farm bills are written in purple ink,” says Moore, using the political shorthand of colors to denote Republicans, Democrats, and politically balanced states. “They’re not red; they’re not blue.”
This article was produced in collaboration with the Food & Environment Reporting Network, an independent, nonprofit news organization producing investigative reporting on food, agriculture, and environmental health.
RDL & Associates, LLC 