Farms vulnerable at any size (Editorial)
A recent study from the USDA’s Economic Research Service pointed out vulnerabilities in large farm operations in the wake of falling farm sector income since 2012.
The study’s authors, Nigel Key, Christopher Burns and Greg Lyons, point out that small farms, those with annual gross income of less than $100,000, appear to be better insulated against the farm economy’s downturn since farms of that size tend to have more off-farm income coming into the household.
“So as the farm economy worsened and the nonfarm economy improved, small farms saw a relatively small increase in farm debt (because they have smaller farms) and a relatively large increase in household income (because they earn a larger share of their income from nonfarm sources),” the authors wrote.
The notion of small farms being better situated than larger farms is an interesting counterpoint to the “get big or get out” rhetoric batted around in farming debates, but it should not be taken as a sign of financial health in farm country.
As businesspeople, farmers want their farms to be able to stand on their own and while getting propped up by off-farm income appears to help as a type of safety net, it’s not something farmers want to continually fall back on.
Small farms are clearly important to New Jersey, the Mid-Atlantic region and the nation. They are preserving a family’s tradition along with land and natural resources and the route most farmers enter the industry. Over time, many small farms grow, bring on another generation or family member and become mid-size or larger farms. This region has more crop diversity than others, too, helping farmers manage risk.
Fewer small farms are in the so-called “red zone” for debt-to asset ratio, loan repayment capacity and solvency than their mid-size and large farm counterparts, but small farms in general saw a larger drop in working capital.
“Small, mid-sized, and large farm operations have seen their working capital fall by 75 percent, 50 percent, and 43 percent, respectively. Despite these large declines, working capital remains close to long-run average levels for midsized and large farms and substantially above 2002 levels. For small farms, working capital is about half the long-run average but about double the 2002 level,” the study said.
However, again the authors said because off-farm income accounts for most household income for small-scale farmers, “a low level of working capital is less indicative of imminent financial stress for these farm households.”
And to be clear, more than 85 percent of large and mid-size farms are outside of the dreaded red zone of the financial stress indicators and only 1 percent of all farms were in extreme financial stress. And the economic downturn, as of 2017, has not been as extreme as the farm crisis of the 1980s, though that also should not be interpreted as good news.
As farmers plan for the future, advice from experts remains the same: Analyze all aspects of the business, consider ways to diversify, give new opportunities their due diligence.
It might bring about hard decisions, but could also lead to a stronger farm.
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