Net farm earnings down
Wisconsin farm profits — as most farmers are aware — were down significantly in 2015 compared to 2014. The state's net farm earnings fell about $1.6 billion mostly due to the significant drop in milk prices.
Bruce Jones, a professor of Agricultural and Applied Economics at the University of Wisconsin-Madison notes that the drop in milk prices wasn't unexpected but it still stung the state's farmers. After averaging $24.50 per hundredweight (cwt) in 2014, milk prices were down about $7 per cwt in 2015.
The money Wisconsin dairy farmers earned by producing milk would have been down even more substantially if state farmers had not increased their milk production by over 4 percent.
"We knew that we were at a pretty high altitude in 2014 with $24 (per hundredweight) milk, so the $2 billion swing in farm income is not necessarily what we wanted to see, but it's something we were expecting," Jones said. "The primary reason is that the value of the output dropped so precipitously."
Jones, speaking at the ninth annual Wisconsin Agricultural Economics Outlook Forum recently in Madison, noted that the decline in farm income will be a challenge for state farmers in the coming year. But he noted that the vast majority of state farm families also have an off-farm income which helps buffer the low prices.
In the case of the smallest farming operations — those that sell less than $100,000 worth of farm commodities in a year — most of the household income is derived from off-farm sources. According to Jones's figures there are about 50,000 Wisconsin farm households that are primarily dependent on off-farm income.
The balance sheet for state farmers continues to be a strong point in the ag economy. "It was strong in 2013 and it got even stronger over the course of 2014," he said, adding that 2014 is the most recent year for which balance sheet data are available. The value of farm assets rose by nearly $6 billion in 2014 while total liabilities increased by $700 million. Using those numbers, the equity position of Wisconsin farms grew a little over $5.5 billion in 2014.
The 2014 value of state farm assets stood at $80 billion with $10 billion in liability for a balance sheet with $70 billion in net assets. "That's up from $50 billion a few years ago."
The capital structure of Wisconsin farmers, reflected by the equity-to-asset ratio, has stayed fairly close to 87 percent for the past few years, he added. "This is an extremely strong financial position in that only 13 percent of farm assets are being financed with debt. This low level of borrowing means there is plenty of collateral available to secure additional loans."
Jones noted that smaller farming operations have twice the value of income per dollar of debt that gives them an asset-to-equity position that offers staying power. One concern, however, is that net working capital has declined over time.
He noted that the liquidity position of Wisconsin farms has slipped in the last couple of years. In 2012 state farms held $8.3 billion in current assets and $2.4 billion in current liabilities for a net working capital position of $5.9 billion.
By 2014, net working capital had fallen to $3.3 billion. "This sizable decline in the net working capital of Wisconsin farms is an indication farmers have been drawing down cash reserves." If farmer income doesn't rebound soon, Jones expects to see further declines in farm liquidity.
"This is a concern because farmers will likely have more difficulty getting operating loans as net working capital declines," Jones noted.
Wisconsin's farm income for 2013 was $3.1 billion; for 2014 it stood at $2.7 billion and for 2015 it was $1.1 billion.