Agricultural Economy in Southern Minnesota

PAUL LANOUEDEAN OF MANAGEMENT

MINNESOTA WEST

Where are we at?

Variability◦ Yields◦ Weather◦ Financial health◦ Commodities◦ Land Ownership◦ Debt load◦ Tax planning

2015 Financial Year in Review

ANALYSIS FINANCIAL TREND DATA

COMPILED BY

AL BRUDELIE ( RETIRED DEAN OF MANAGEMENT)

MARCH 2016

2015 in Review

Gross farm income was $840,341-2015, from $925,932 in 2014. Down 9.2%.

Cash op. expenses was $724,501-2015, from $776,714 in 2014. Down 6.7%.

Net cash income was $115,840 in 2015, from $ 149,218 in 2014 . Down 22.4%.

Net farm income was $35,915 Down from $ 96,337 in 2014, Down 62.7%.

2015 in Review

Corn production was up 25.7% to a yield of 205.9 bu. in 2015 from a yield of 163.8 in 2014.

The highest yield ever was in 2015 at 205.9 bu. The lowest was 54 bu. in 1965.

Soybean production was up 27.8% to a yield of 60.1 bu. in 2015 from a yield of 47.0 bu. in 2014.

The lowest yield was 18 bu. in 1996. The highest yield was 60.1 bu. in 2015.

Crop acres

667 686 678 697683

274 247

730

977930

1363

1571

1156

957

1094

200

400

600

800

1000

1200

1400

1600

Average Low 20 % High 20 %

2011 2012 2013 2014 2015

Net Farm Income (Ave)

106,964

149,940139,986

61,350

183,808199,794

272,544

73,67896,337

35,915

0

50,000

100,000

150,000

200,000

250,000

300,000

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Southern Minnesota Book

Profitability AnalysisRate of Return on Assets

11.1

14.2

10.8

3.7

11.5 11.5

13.7

2.63.7

0.80

2

4

6

8

10

12

14

16

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Return on Assets

Cost

Non-farm Income

15

20

25

30

35

40

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Th

ou

san

ds

Off Farm Income

Non-Farm Income & Family Living

Both have trended upward over the years. In many cases, the employee benefits add significant value to the non-farm employment.

Non-farm income pays for approximately half of household and personal spending.

10

30

50

70

90

110

130

20062007

20082009

20102011

20122013

20142015

Tho

usan

ds

Family Living Costs Non-Farm Income

Farm & Family SpendingWhere Did the $1,024,388 Go in 2014?

$73,017 Fdr Lvstk & Cust Wk

7.6%$157,532

Seed, Fert, Chem16.4%

$28,620 Other Crop Exp

3.0%

$101,444 Purchased Feed

10.6%

$40,248 Other Lvstk Exp

4.2%

$33,273 Gen Farm Exp

3.5%

$67,040 Fuel & Repairs

7.0%

$40,094 Hired Labor

4.2%

$162,720 Interest & Leases

16.9%

$20,513 RE Taxes & Utilities

2.1%

$139,264 Capital Purchases

14.5%

$96,497 Family Living

10.0%

Each farmer, on average, spent $960,262 in the Greater Communityin 2015

Average Money Spent by Each Farmer in the Greater Community: $960,262 Average Money Spent by Each Farmer in a 40 Year Career: $38,410,480

Money Spent in Community by 1287 Farmers: $1,235,857,194

Farm Financial Standards

The American Bankers Association has endorsed the use of sixteen “standards” to rate business performance (see page 20).

These standards are measures of:◦ Liquidity

◦ Solvency

◦ Profitability

◦ Repayment Capacity

◦ Financial Efficiency

Current Ratio (Liquidity)Current farm assets / current farm liabilities

0.98

1.25

1.45

1.171.27

1.371.48

1.6

1.23 1.23

1.61

1.871.98

1.74

2.04

2.26

2.50

2.03

1.79

2.042.2

2.41

2.182.32

2.66

2.90

2.42.24 2.21

1.64

0

0.5

1

1.5

2

2.5

3

3.5

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Low 20% Average High 20%

Working Capital to Gross Income All Farms

23

2932.9

28.3

36 36.842.2

35.5

29.927.4

-1

9

15.8

6.910.3

15.3 16.8

24.3

14.811.8

3237

42.5 42.845.6

43.1

51.4

42.6

32.1

39.9

-10

0

10

20

30

40

50

60

20062007

20082009

20102011

20122013

20142015

Average Low 20% High 20%

Debt to Asset Ratio (Solvency)Total farm liabilities / total farm assets

20

25

30

35

40

45

50

55

60

65

70

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Low Average High

•Green <30 % Debt

Yellow 30 to 70 % Debt

•Red >70 % in Debt

Rate of Return on Farm Equity (Profitability)[Net farm income from operations minus value of unpaid labor & mgmt] / average farm equity

-30

-20

-10

0

10

20

30

40

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Low 20 % Average High 20 %

Watch your trendinformation to be sure you are headingin the desired direction.

Operating Profit Margin Ratio (Profitability)[Net farm income from operations + farm interest expense minus value of unpaid labor & mgmt] / gross revenue

-30

-20

-10

0

10

20

30

40

'06 '07 '08 '09 '10 ;11 '12 '13 '14 '15

Low Average High

>25 % Green

10 % to 25 % Yellow

<10 % Red

Term Debt Coverage Ratio

-1

0

1

2

3

4

5

6

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Avarage Low 20 % Heigh 20 %

Capital Replacement Margin 2015

-47,775

-230,462

68,990

128,129

-250,000

-200,000

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

Replacement Margin Accural

Average Low 20 % High 20 % High 10%

Asset Turnover Rate (Financial Efficiency)Gross revenues / average total farm assets

20

25

30

35

40

45

50

55

60

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Low 20 % Average High 20 %

Operating Expense Ratio (Financial Efficiency)[Total operating expenses minus depreciation] / gross revenue

0

20

40

60

80

100

120

'06 '08 '10 '12 '14

Low Average High

>85 % is Red

75 % to 85 % Yellow

<65 % is Green

Operating Expense Ratio 2015

84.6

6.84.24.5

99.6

64.7

-10.4

74.5

6.83.215.8

-20%

0%

20%

40%

60%

80%

100%

Average Low 20 % High 20 %

Net Farm

Income Ratio

Interest

Expense Ratio

Depreciation

Expense Ratio

Operating

Expense Ratio

Conclusions about ratiosBusiness trend lines are priceless

Compare information for the last 5 years

Compare farm data to peer groups

How does the business stack up?

What are your new strategies?

Managing in volatile times?How do you improve your bottom line?◦ Conduct Variance Analysis (planned vs. actual)

◦ Position your balance sheet

◦ Manage 100 things 1% better each year

◦ Manage the operation to be on the right side of the financial divide

How do you survive the volatile ride ahead?

Conduct sensitivity analysis cash flows

Aspire to be a top half marketer by having a written marketing plan

Form peer advisory groups

Form strategic alliances

Capture economies of scale, reducing costs, improving asset utilization

Looking forward to 2017What is in store?

Let’s look at impact of price and yield variability on farm profit.

Access Farm Profit Tool

Have a Great Year in 2017!MAKE SURE YOU ARE ON YOUR A GAME IN MANAGING YOUR OPERATION THIS YEAR!