Exactly two years ago, we knew we were heading into a down cycle in the dairy industry following the major high of 2014.
How well each farm would fare through the coming years of substantially lower milk prices would be heavily influenced by the financial health of the farm going in. Cash or near-cash reserves would be tapped.
Cash is cash, but what is near-cash? Here, we are looking at the current assets (CA) of the farm business. These include cash, savings, pre-paid expenses, accounts receivable, crop and feed inventories, supplies, and any market livestock such as bull calves and steers — all items that will be used in the coming year to produce crops and milk.
How do we evaluate the farm’s cash position, or liquidity — the ability to buy what is necessary to grow crops, make milk and pay the bills when they are due?
Three simple measures: current ratio, working capital, and working capital to gross income. These are calculated using a farm’s balance sheet and income statement.
Real farms’ numbers
At the time, we looked at data from the 35 Ohio dairy farms that had completed an analysis of their 2013 business year with the Ohio Farm Business Analysis and Benchmarking Program. Now we can compare 2013 with the years that followed.
Table 1 shows what we expected of dairy farms in 2014. Working capital increased, as did the current ratio. Going into 2015, the 38 farms that participated in 2014 had an average current ratio of 2.53, or $2.53 of current assets for every $1 of current liabilities. This would be considered a strong position.
Working capital increased, however working capital to gross income did not. Why?
Even though working capital increased (which is simply total current assets less total current liabilities), gross revenues were extremely high in 2014, simply because the milk price was at a record high.
2015 was a bad year
What happened next? 2015’s numbers are, not surprisingly, disappointing as they reflect the challenges faced by dairy farmers. Current ratio dropped below 2 to 1.67, or $1.67 of current assets for every dollar of current liabilities.
Working capital declined further, averaging $250,564, and working capital to gross income plummeted to 13.6 percent.
It is important to note that while many of the same farms participate in the program each year, new farms enter and a few farms exit the program each year.
What impact did 2016 have on these numbers? Farms are currently wrapping up their 2016 business year information and completing their 2016 analyses. These numbers will be finalized early this summer.
Know your numbers
Current ratio, working capital, and working capital to gross returns. These are important, basic numbers that each farm should know for their farm business.
If your current system does not allow this sort of analysis, now is prime time to join the Ohio Farm Business and Benchmarking program. Visit http://farmprofitability.osu.edu to view past analyses and find out more about Ohio’s program.
Contact us to talk about what would work well for your farm at 330-533-5538 or shoemaker.3@osu.edu.
