Purdue ag economist says farmers’ working capital has worsened
An ag economics professor at Purdue University says farmers’ working capital has deteriorated in recent years.
Michael Langemeier says working capital is a measure of the ability to cover short-term debt including operating loans and principal payments due within the year.
“If you look at the US farm sector, in 2012 working capital was approximately $180 billion and in 2020 its projected to only be $55 billion,” he says. “That’s a substantial drop and it’s tied to the very low margins we’ve seen since 2014.”
He says the amount of working capital a farm needs vary from farm to farm.
“I like to use a stoplight to cover this…A green light would be a working capital to gross revenue over 35 percent,” he says. “The red signal is when you drop below 20 percent. Unfortunately, when you look at the US farm sector balance sheet, the average is now below 20 percent illustrating how problematic this working capital situation really is.”
Langemeier says if margins remain tight some farmers may need to use equity they have in land to help working capital.
“Refinancing land debt and using some of those proceeds to increase working capital is not an ideal situation but that’s one of the options,” he says. “Another thing that a lot of farms have been doing is not spending very much money on assets. Delaying purchases of machinery, not buying land, and trying to rent land and machinery is a strategy.”
Working capital has been below $80 billion since 2016.