Agricultural Economy in Southern Minnesota PAUL LANOUE

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1 Agricultural Economy in Southern Minnesota PAUL LANOUE DEAN OF MANAGEMENT MINNESOTA WEST

2 Where are we at? Variability Yields Weather Financial health Commodities Land Ownership Debt load Tax planning

3 2015 Financial Year in Review ANALYSIS FINANCIAL TREND DATA COMPILED BY AL BRUDELIE ( RETIRED DEAN OF MANAGEMENT) MARCH 2016

4 2015 in Review Gross farm income was $840, , from $925,932 in Down 9.2%. Cash op. expenses was $724, , from $776,714 in Down 6.7%. Net cash income was $115,840 in 2015, from $ 149,218 in Down 22.4%. Net farm income was $35,915 Down from $ 96,337 in 2014, Down 62.7%.

5 2015 in Review Corn production was up 25.7% to a yield of bu. in 2015 from a yield of in The highest yield ever was in 2015 at bu. The lowest was 54 bu. in Soybean production was up 27.8% to a yield of 60.1 bu. in 2015 from a yield of 47.0 bu. in The lowest yield was 18 bu. in The highest yield was 60.1 bu. in 2015.

6 Crop acres Average Low 20 % High 20 %

7 Net Farm Income (Ave) 300, , , , ,000 50, , , , , , ,964 96,337 73,678 61,350 35, Southern Minnesota Book

8 Profitability Analysis Rate of Return on Assets Return on Assets Cost

9 Thousands Non-farm Income Off Farm Income

10 Thousands Non-Farm Income & Family Living Both have trended upward over the years. In many cases, the employee benefits add significant value to the nonfarm employment. Non-farm income pays for approximately half of household and personal spending Family Living Costs Non-Farm Income

11 Each farmer, on average, spent $960,262 in the Greater Community Farm & Family Spending 2015 $73,017 Fdr Lvstk & Cust Wk $96,497 $139,264 Where Did the Family $1,024,388 Living Capital Purchases Go 7.6% in 2014? 14.5% 10.0% $157,532 Seed, Fert, Chem 16.4% $20,513 RE Taxes & Utilities 2.1% $28,620 Other Crop Exp 3.0% $162,720 Interest & Leases 16.9% $101,444 Purchased Feed 10.6% $40,248 Other Lvstk Exp 4.2% $40,094 Hired Labor 4.2% $67,040 Fuel & Repairs 7.0% $33,273 Gen Farm Exp 3.5% 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

12 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

13 Current Ratio (Liquidity) Current farm assets / current farm liabilities Low 20% Average High 20%

14 Working Capital to Gross Income All Farms Average Low 20% High 20%

15 Debt to Asset Ratio (Solvency) Total farm liabilities / total farm assets Red >70 % in Debt Yellow 30 to 70 % Debt Green <30 % Debt '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Low Average High

16 Rate of Return on Farm Equity (Profitability) [Net farm income from operations minus value of unpaid labor & mgmt] / average farm equity 40 Watch your trend information to be sure you are heading in the desired direction '06 '07 '08 '09 '10 '11 '12 '13 '14 ' Low 20 % Average High 20 %

17 Operating Profit Margin Ratio (Profitability) [Net farm income from operations + farm interest expense minus value of unpaid labor & mgmt] / gross revenue 40 >25 % Green 10 % to 25 % Yellow <10 % Red '06 '07 '08 '09 '10 ;11 '12 '13 '14 '15 Low Average High

18 Term Debt Coverage Ratio '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Avarage Low 20 % Heigh 20 %

19 Capital Replacement Margin , , ,000 50,000 68, , ,000-47, , , , ,462 Average Low 20 % High 20 % High 10% Replacement Margin Accural

20 Asset Turnover Rate (Financial Efficiency) Gross revenues / average total farm assets '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Low 20 % Average High 20 %

21 Operating Expense Ratio (Financial Efficiency) [Total operating expenses minus depreciation] / gross revenue >85 % is Red 75 % to 85 % Yellow <65 % is Green '06 '08 '10 '12 '14 Low Ave ra ge High

22 Operating Expense Ratio % 80% 60% 40% 20% 0% -20% Average Low 20 % High 20 % Net Farm Income Ratio Interest Expense Ratio Depreciation Expense Ratio Operating Expense Ratio

23 Conclusions about ratios Business 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?

24 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

25 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

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27 Looking forward to 2017 What is in store? Let s look at impact of price and yield variability on farm profit. Access Farm Profit Tool

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