Table 1 provides an illustration of the repayment capacity measures discussed above for a case farm in west central Indiana. This case farm has 3,000 acres of corn and soybeans. Cash used for capital replacement was computed by multiplying depreciation by 1.15. This ensures that there are enough funds available long-term to replace equipment and to expand. Capital debt repayment capacity for the case farm is $259,006. This amount was large enough to cover principal and interest on term debt. Consequently, the farm’s capital debt repayment margin was a positive $127,254. The replacement margin was negative, though, indicating that the farm did not generate enough funds in 2023 to cover both term debt obligations and to replace assets. This is also signified by a replacement margin coverage ratio that is less than one or less than 100%. Because of the negative projected replacement margin in 2023, it is important for this farm to evaluate whether the replacement margin is positive over the long run. The average replacement margin from 2007 to 2023 for the case farm was $230,414, indicating that the farm had the ability to cover both term debt obligations and replace assets during this period. For this farm to expand in the future, the average replacement margin over the next five to ten years will also need to be positive. 1 “Financial Guidelines for Agriculture, January 2017.” (Farm Financial Standards Council) Table 1. Repayment Capacity Measures for White County Farms, 2023 Capital Debt Repayment Capacity and Margin, and Replacement Margin Accrual Net Farm Income 1 $78,853 Off-Farm Income 2 0 Income and Self-Employment Taxes 3 49,769 Interest Expense on Term Debt 4 72,218 Depreciation 5 263,567 Family Living Withdrawals 6 105,863 Capital Debt Repayment Capacity {(1+2-3+4+5)-6} 7 $259,006 Principal on Term Debts and Capital Leases 8 59,534 Unpaid Operating Debt from Prior Period 9 0 Capital Debt Repayment Margin {7 - (4+8+9)} 10 $127,254 Cash Used for Capital Replacement 11 303,102 Replacement Margin {10-11} 12 -$175,848 Term Debt and Capital Lease Coverage Ratio {7 / (4+8+9)} 13 196.6% Replacement Margin Coverage Ratio {7 / (4+8+9+11)} 14 59.6% Michael Langemeier, Ph.D. Associate Director, Center for Commercial Agriculture Purdue University MLangeme@Purdue.edu Michael is the director of cropping systems for the Center for Commercial Agriculture in the Department of Agricultural Economics Department at Purdue University. His extension and research interests include agricultural finance, cost of production, leasing principles and transition planning. Michael teaches courses in farm financial management and tax planning strategies. JANUARY/FEBRUARY 2025 53
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