Economics: November 1998

This has been a very difficult year for all of the agricultural producers in this area. Most of the area has been hit by the drought, experienced lower cattle prices, liquidated cows and been left with a very limited hay supply. At least we have cheap corn.

Where does this leave us? I realize that many of you will produce at a loss for 1998, but at what level and how that loss affects your balance sheet is a very important factor to the continued health of your operation.

On Jan. 1, 1998, the debt-to-equity ratio for the nation's farms was 17.4%, the lowest level since the early 1960s. This ratio will increase after the losses incurred this year, but it should still be at a comfortable level for most operations. In 1998, we have seen farm income fall caused mainly by weak commodity prices. And we shouldn't expect the overall price outlook to show much improvement in 1999, so farm income will show little improvement for the year.

A recently released USDA paper stated that 65% of the nation's farms were in a favorable financial position at the beginning of 1998. Those farms had a positive income and debt-to-asset ratios of less than 40%.

Another 18% had marginal incomes, but had debt-to-asset ratios of less than 40%. These farms generally didn't have debt service problems, but could have struggles with a positive cash flow.

About another 11% of the nation's farms were marginally solvent on January 1, 1998. These operations generally had positive returns, but will probably have troubles meeting their large debt service requirements.

Finally, about 6% of the nations operations will have trouble surviving because of negative incomes and debt-to-asset ratios above 40%.

In the Southern Plains, we had fewer operations with a favorable financial performance than the national average at the beginning of 1998. And after this year, the loss of equity incurred by most operations will increase the number of operations with marginal financial performance.

While many operations have enough equity or off-farm income to withstand a year or two of lower commodity prices, every operation should make the necessary plans to still be producing in the year 2000 and beyond.

To still be producing in the year 2000, you should determine your present financial status. Take time to analyze your financial performance, and make some projections to see if your operation can withstand a prolonged period of lower prices.

Take the opportunity to plan for next year, and take a close look at each aspect of your operation. Make sure that each part is going to be an integral part of your survival into the 21st century. If you need help analyzing this information, please give us a call. We would be glad to help you.