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- "Debt-to-asset ratio is one of the keys if not the key indicator we need to look at. We need to come up with a farm plan to generate profits, and profit is yield times price minus cost. Then, we need to look at financial indicators at the end of the year and, hopefully, they’re better than where you started.”
Different financial measures
There are a lot of different financial measures, he says, and they all mean something, but there are only a few that are primary indicators and that means a lot. “The debt-to-asset ratio is probably the key ratio that we look for in agriculture. It’s basically total farm liability divided by total farm assets.
“When we do farm plans, we look at our net farm income and our cash flow. But one measure that I think is overlooked is operating profit margin. It shows the operating efficiency of the business, but it also takes into account your ability to market, to manage inputs and your ability to make yields.
“That’s a good indication of how you’re doing as a farmer.”
The debt-to-asset ratio is a great picture right now for U.S. agriculture, says Lamb. Going back to 1985-86, the debt-to-asset ratio was 23 percent.
“In the last five years, we’re gone to about 10 percent, but we have to be careful and not fall asleep with these numbers.
“Our average is 10.2 percent, all farms, but that takes into account farms that don’t have any debt. If we take into account farms that just have debt, the ratio goes up.
“Large farms, even though they may be creating much more revenue, have higher debt-to-asset ratios than small farms.”
A troubling number, he says, is that farmers who are under 35 have a 40 percent debt-to-asset ratio.
“It’s very difficult for them to enter farming with this number on their balance sheets,” he says.
Land values are propping up or dropping down these balance sheets, says Lamb. Looking at the value of farm real estate in the lower Southeast, the average per acre in Georgia is $2,800 to $4,300; in Florida, $4,600 to $13,000; and in Alabama, $1,800 to $2,750.
Farm income and expected earnings determine land value, says Lamb.
“With the commodity prices we’re seeing right now, coupled with current interest rates, you’re looking at expected earnings in agriculture. There’s not nearly as much land being offered right now, and that’s driving up the price of real estate.”