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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.”
Be conservative with expectations
In summary, Lamb urges growers to be conservative with their yield expectations. Don’t over-estimate your yields if you’ve never reached that yield goal, he says.
And to minimize the impact on your farm income, budget for increases each year. “There’s no doubt inflationary factors will continue to creep in, increasing the cost of producing our food.
“Be honest with yourself — try and reach your goal and not simply try and fool your bank into giving you a loan for another year. You must have goals so you can retire one day.”
Debt-to-asset ratios are at the lowest level in 50 years, and that’s great for American agriculture, says Lamb.
“However, debt-to-asset ratio is heavily influenced by the value of the farmland, which represents 80 percent of the average farm’s net worth.
“Farmland is at a high level, at an unsustainable high level. If prices go down and interest rates go up, your debt-to-asset ratio takes an immediate hit when they re-value your land.
“I’m not sure that on a long-term basis, the land prices we have now are truly sustainable for agricultural production.”
This also creates a large entry barrier for new farmers, he says.
“If they have to go out and rent or buy the land and start farming, it’s almost impossible. The rule of thumb is that a 50-percent reduction in farmland leads to a 35-percent reduction in net worth.
“You have to be prepared for that if you own land at current prices. It can destroy you financially, and we saw it happen in the mid-1980s.”
Finally, he advises, monitor your progress. You need to know from year-to-year if your debt-to-asset ratios are going up, going down or staying static, and you need to fix it. There are ways to fix the problems if you know you have problem, says Lamb.