payments . Often , this results in the need to refinance losses to term debt . Refinancing is a short-term option ; however , producers must map out a corrective plan for long-term sustainability .
Another striking difference appears in working capital , the financial shock absorber . The working capital to gross revenue ratio was above 50 percent for the more profitable farms . Lower-level farms averaged only 1 percent working capital . This creates a difficult situation , especially if the economic downturn continues .
In one of my recent sessions , one lender stated that his customers were “ burning through working capital like rocket fuel .” As a result of 2015 economics , the lower 20 percent of farms averaged approximately $ 270,000 less in working capital when compared with the rest of the FINBIN farms . In contrast , the top 20 percent preserved much of their working capital .
Often , producers ask about the impact of different debt levels . Well , according to FINBIN , the lower 20 percent of farms exhibited a debt to asset ratio that was 17 percent higher than their counterparts at the other end of the spectrum . However , low interest rates are the differentiators on financial leverage in this era with
8.00
7.00
6.00 less of an impact as compared to previous time periods .
Although FINBIN includes data from farms in several states , these results are similar to those found in other state record databases as well . As the duration of the reset continues , the gap of profitability will continue to widen . As demonstrated by the top performers , invest in productive assets and maintain close control on fixed and variable costs . In addition , it is critical to build and maintain working capital throughout the economic cycle . Finally , the most profitable farms and producers focus on modest family living costs . These economic times require a strategized , sound business plan that is both executed and monitored . Often , top performers conduct these three critical elements of strategy , execution and monitoring with a team of advisors .
As the economic reset continues , remember to not only monitor finances but address the emotional and behavioral component as well . Examining peer data , utilizing resources and implementing an updated plan will help avoid emotional decisions and missteps on your road to sustainable profit and success . Remember that above average results require above average management and practices .
This chart illustrates that 30-day Farm Credit issues remain at historically low levels through May 2016 although an increase has occurred . The gap between long-term and short-term rates has started to decrease . Call your FCS Financial expert to discuss your interest rate risk and options available including fixed rates .
30-Day vs 15-Year Farm Credit Bond
15-Year Farm Credit 30-Day Farm Credit Fed Funds Target
5.00
All-in cost
4.00
3.00
2.00
1.00
0.00
Date