26 JANUARY / FEBRUARY 2023 Brady Brewer, Ph.D. Assistant Professor, Agricultural Economics Purdue University Brewer94 @Purdue.edu Farm incomes in 2020 and 2021 were the best farmers have seen over the past decade. In 2020, incomes were supported by transfers such as the Coronavirus Food Assistance Program and other ad-hoc government programs. The 2021 income cycle was bolstered by higher commodity prices. The United States Department of Agriculture Economic Research Service is projecting 2022 farm income numbers to exceed both 2020 and 2021 levels. This has been good for farmers and bankers alike. However, there is a lot of uncertainty in the markets. The Ukrainian conflict has increased volatility in certain commodity markets and increased input prices. This has created concern that we are in a similar position as what we saw in 2012 and 2013. The last time farm incomes were high and subsequently dropped, agriculture experienced liquidity and repayment issues. According to data from the Center for Farm Financial Management at the University of Minnesota, farm incomes are expected to drop significantly for 2023. This is from the expectation that commodity prices will moderate along with a continued increase in input prices. Operating expenses are expected to increase 29% for the 2023 crop year, on top of the 23% increase farmers absorbed in 2022 relative to 2021 input prices. Not all farm types should expect a large decrease in income in the coming year. Hog and beef farms in particular look poised to continue strong incomes. Dairy farms, however, are on the opposite side of the Farm Margins to Narrow in 2023 coin as they appear to be some of the hardest impacted by falling commodity and rising input prices. The good news, even with the lower expectations for farm income, is that equity ratios look to remain mostly unchanged for 2023. The projections for the median farm’s debt-to-asset ratio is 31% for 2023. While this is up from the 28% in 2022, it is even with solvency levels in 2020. Where farms are likely to be the most impacted is a possible decrease in working capital and liquidity. Lower profitability may cause a farm to burn through working capital at an increased rate in 2023, impacting both the farm’s current ratio and term debt coverage ratio. Working capital is something all bankers who lend to farmers need to keep a close eye on as we enter what could be a multi-year period of lower incomes. To prepare for this likely downturn in the 2023 crop cycle, bankers need to ask farmers what their plans are should these anticipated lower incomes become reality. If cash flows are not there to pay the expenses, what will be the farmers’ plans to generate cash or burn through working capital? Additionally, bankers need to ask farmers how or if they plan to adjust their crop production planning given the higher input costs. A farmer needs to analyze each cost to determine if it is necessary. Producers also need to ensure all risk management plans are in place to limit the downside risk their farm faces. Additionally, bankers also need to be sure to stress test their farmers to better understand how and if their farmer customers will be impacted by this lower income environment. HB AG BANKING
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