_ LMSU a RETURNING MATERIALS: Iace in book drop to remove this checkout from your record. FINES will be charged if book is returned after the date stamped below. ALTERNATIVES l0 IIPROVS THE FINANCIAL PBRPORHANCB OP TIRES SIGEBI LSVBRAGBD PARIS A CASS STUD! APPROACH BY James M. Schuler A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of MASTER OF SCIBRCB Department of Agricultural Economics 1986 ASTRACT ALTERNATIVES TO IMPROVE THE FINANCIAL PERFORMANCE OF THREE HIGHLY LEVERAGED FARMS A CASE STUDY APPROACH BY James M. Schuler The plight of the American farmer has become a major issue in 1985. Farmers must manage their farms in an agricultural economy that is characterized by low commodity prices, falling land values and for many, higher debt levels. Fortunately, Michigan has not been hit as hard as some mid—western states. There are still many Michigan farmers who are wondering how they are going to survive the depressed state of affairs. In order to determine what can be done from a financial standpoint, personal on-farm interviews were conducted with three highly leveraged farmers about their situations. These were used as background in developing financial plans in) achieve better profitability and solvency. This thesis is dedicated to my parents, Donald and Marjorie Schuler. They are the best. ii I would like to thank my major professor and research supervisor, Dr. Ralph E. Hepp. Had it not been for this man's knowledge and expertise, completion of this project might not have been realized for me. I truly appreciate having had the opportunity to work with a professional of such caliber. Bis no pressure philosophy is representative of his understanding personality and for this reason will always be held in my highest esteem. I would also like to thank Dr. Gerald D. Schwab for being a member of my committee and contributing his time and assistance. Several people in the Department of Agricultural Economics contributed to the completion of this thesis. Dr. Lester V. Manderscheid saw to it that all administra- tive matters were provided. Mrs. Shirley Rabbage was responsible for the secretarial functions involved. Thanks goes to these any many other individuals who helped and encouraged me. Special thanks must be given to my fiancee, AngeLa Rodabaugh. Her patience, consideration and sacrifices will always be remembered. iii LIST OF LIST OF CHAPTER I. II. TABLES . . FIGURES. . TABLE 0? CONTENTS Introduction A. General Financial Situation. A-l. A-2. A-3. A-4. A-S. A-6. Interest Rates . . . Depressed Farm Price Weak World Demand. . S. Decline in Farmland Val Poor Farm Income . . Increase in Average Deb Over Time. . . . . B. Reasons for Concern. . . . 8-1. 8-2. 8-3. 8-4. e Highly Leveraged Positi n Cash Flow Needs. . . Thin Profit Margins. L1 t O C Frequency of Poor Finan i Performance. . . . C. Statement of Purpose . . . D. Objectives . . . . . . . . E. Procedures and Methodology E-lo 8-2. 3-3. Description of Financial A. Balance Sheet. . . A-lo A-Z. A-3. B. Income Statement . B-l. C. caSh Flow. 0 I O O O O Source of Data . . . Case Studies . . . . Forecasts. . . . . . Assets . . . . Liabilities. . Net Worth. . . Gross Profit . Expenses . . . Net Farm Income. Current Cash F ow Pr Alternatives to Improve Cash Flows . . . . iv obl Statements em ooooooomooooor‘omoooo S (D ooooouom ecouumcoa mboufipouo an cocfi>0um mucsm muommm Heu0u co u¢>0¢upb 080000 Elam 8 uwgua ammuoucu bow cocoa: aquOLQ macho momconxu now cause: uuuoum mucuu moamm no gazebo aquOOQ swoon no suzouo acosumo>nu m.uocxo co cuaumm moamm so 592. Duncan ossHo> mmocdmsn massage: o>uomou ammo mocm>uom Euounuuosm muo> >uco>aom eucaluuogm g amououcu mafia; amououcu + 0500:“ sumo um: 53: 85.2328: ~33 muommm Hmu0u\mo«uuafinmfim Hobo» muommm doDOu \ moamm muommm coxfiu \ moamm DALOLQ Esau modum\omcomxo amououcfi uauoLQ Emma mmOLm 338.83 a n .Hnu. modem Illauqlwwamw H n Anna. u«u0um Esau macaw 3 cube: um: \.osoocu um: women \ oeooca um: Hmuammo meaxuoa um: \ «mama mo«u«~«b¢«~ acouusolmuommm acouuao 833%: 5:8 maauauauuuqluluuummMIwmuuumw meaufiaqnmun acouu30\muommm u:Ouuso g cashew amououcn moses 338.8388 039. D89 mmquuMIummuuuma Lo>ocuza uomma Hobos 25 #82 8x: mmquumnuuauquma DauOLm macho ou amououca Suns 83880 moflmm ca omcmgv ucoouom aquOGA mmouo cu omcanu accused 53: .32 so 63% moaum mo accouom me banana 338 8383 8.2 a... 88m mmqwumnuuqaummuaumum 388 813: 32 cauum guano 035. £088 gamma; newumm Houocmcfim mo aumeszm .nnm manta CHAPTER III WW5 Wm A- W The focus of this chapter is on the financial situation of three farm types in Michigan, from 1981 through 1983. Each of the three farm types include only farms which bad debt ratios (total liabilities divided by total assets) of seventy percent (70%) or greater in 1983 and were clients of the Telfarm record keeping project sponsored by the Michigan State University Cooperative Extension Service from 1981-83. The three types analyzed are cash grain, hog and dairy farms. B- Cams: Before the financial analyses are presented, it is advisable to point out the potential problems of the data which may bias the analyses. 1" Only 3 years are included in the data. In addition, the three year period (1981-83) was the worst for agriculture in recent history. 2. The farms analyzed were all highly leveraged. The high degree of leverage tends to place more burden on these farms than the average Michigan farm because of large debt servicing obligations. 31 32 3. Telfarmers have larger farms than average, when compared to census data. 4. Many farmers on Telfarm are inconsistent with their financial reporting. 5. The financial statements analyzed in this chapter are averages taken from each of the three farm types. Therefore, some changes in the financial statements may be the result of using averages. 6. The data includes a total of thirty-one farms, which is about 5% of all farms on Telfarm in 1983. 7. Telfarm is not a double entry accounting system, which means there is no cash flow reconciliation statement. This combined with the fact that not all farmers report data for all cash flow entries makes it impossible to construct a cash flow reconciliation statement using averages. C- W The number of farms included in this report are shown on Table 3-1. The number of tillable acres are three-year averages for each farm type. The cash grain farm type also includes farms classified as Saginaw Valley because both types are cash crop. Dairy farms include both northern and southern specialized dairy farms. 33 TABLE 3-1: Farms Studied by Type, Number and Size Number Iillablg Acres ram mm moss! Rested. Cash Grain 7 185* 488 Swine 7 259* 174 Dairy 17 180 158 *Adjusted for inconsistencies in data. D. W The purpose of this chapter is to introduce the reader to the general financial situation that highly leveraged Telfarmers experienced from 1981 to 1983 in order to get an idea of why they have experienced financial stress over this period. It is not intended to be used as a basis for idetermining financial alternatives for these farm types, but rather as a means of conveying how several highly leveraged farm types have survived amidst high debt levels with little or no income. E. W The remainder of this chapter analyzes the balance sheets, income statements, cash flow summaries and financial ratios for the three farm types over the three year period. 'The differences in the farm types require that each be analyzed independent of the other two, so as to provide a more comprehensive and meaningful analysis. 34 To be consistent in the analyses of the average highly leveraged farm types in this chapter and the case studies in the following chapter, estimated market values were used in the determination of the values of machinery and equipment. The case studies used market values of machinery and equipment to determine the value of total assets whereas the averages used book values. The difference occurs because some Telfarmers use market values while others use book values. Therefore, to determine the estimated market value of machinery and equipment for the average farm types, the average increase in market value over book value was calculated for those farmers who reported market values. This amount was added to the average book value for the corresponding farm type. F. s ' e a ed as ra'n Farms F-l. Cash Graig Balance sheets a. Assets According to the values shown on the average balance sheets for 1981-83, highly leveraged cash grain farms have increased their amount of total assets. Table 3-2, on page 35 shows the average balance sheets on.tdghly leveraged cash grain farms for 1981- 83. Total assets were $546,291, $592,977 and $629,251 in 1981, 1982 and 1983, respectively. 35 TABLE 3-2: Telfarmers, For Year Ended December 31, 19xx ASSETS Current Assets Cash Crops Feed Supplies Total Current Assets Intermediate Assets Accounts Receivable Machinery e Equipment (Market Value) Non-farm Business Assets Household Assets Total Intermediate Assets Fixed Assets Estimated Value of Real Estate TOTAL ASSETS LIABILITIES & NET WORTH Current Liabilities Accounts Payable Production Credit Association Banks Farmers Home Administration Total Current Liabilities Intermediate Liabilities ---..--.--.8..3=.8-‘8888 Merchants & Dealers Production Credit Association Banks Farmers Home Administration Other Credit Institutions Total Intermediate Liabilities Long-term Liabilities Banks Farmers Home Administration Insurance Companies Individuals Federal Land Banks Total Long-term Liabilities TOTAL LIABILITIES Net Worth TOTAL LIABILITIES & NET WORTH Average Balance Sheets On Cash Grain Farms, 1981-83 1981 1982 1983 5 S S 5023 3456 20042 25910 19525 15732 34430 48146 23623 4020 10631 7070 69383 81758 66467 0 1168 29243 144322 134751 155925 2643 2643 0 0 0 4857 146965 138562 190025 329943 372657 372759 546291 592977 629251 857 0 0 2871 3211 15396 28632 51963 56305 6849 7656 9017 39209 62830 80718 1353 3789 52 718 803 3849 7812 14172 15356 21690 24244 28553 38614 54323 27693 70187 97331 75503 15618 28344 30712 28539 31901 37570 44 0 0 196927 166192 201937 96068 73714 72244 337196 300151 342463 446592 460312 498684 99699 132665 130567 546291 592977 629251 36 The increase in the value of total assets from 1981 to 1982 was $46,686. This increase was due to changes in each asset category. Current assets increased by $12,375 primarily because of build-ups of feed and supplies inventories. Intermediate assets declined by $8,403 because of a decline in the estimated market value of machinery and equipment. The estimated value of real estate rose $42,714 but the reason for this increase is not apparent. It may just be due to a change in the values estimated for land, residence and/or buildings and improvements. The increase in the value of total assets from 1982 to 1983 was $36,274. This increase was the result of changes in current and intermediate assets ($102 change in fixed assets). Current assets declined by $15,291 because of lower values for all inventory items. Combining this with the substantial increase in the amount of cash would suggest a large liquidation of inventories. Other evidence of this is the $51,463 increase in intermediate assets which resulted mainly from a $28,075 increase in accounts receivable. b. Liabilities Over the period total liabilities also increased continuously. Total liabilities were $446,592 in 37 1981, $460,312 in 1982 and $498,684 in 1983. Current, intermediate and long-term debt all increased from 1981 through 1983, indicating more strain on cash flow. The increase in total liabilities from 1981 to 1982 was $13,720. This increase was due to a $23,621 increase in current liabilities, a $27,144 increase in intermediate liabilities and a $37,045 decrease in long-term liabilities. Current liabilities increased mostly because of increased borrowing from banks, probably in the form of operating loans. Intermediate liabilities showed increased borrowing from all sources, with the largest portion from banks and others. Offsetting these increases, long-term liabilities declined because of the repayment of principal to individuals on land contracts and the Federal Land Banks on real estate. Between 1982 and 1983 total liabilities increased by $38,372. This resulted from a $17,888 increase in current liabilities, a $21,828 decrease in intermediate liabilities and a $42,312 increase in long-term liabilities. Current liabilities increased because of increased borrowing from all operating sources. Although the decline in intermediate liabilities was 38 partially due to repayment to merchants and dealers for equipment, it is suspected that the majority of the decline resulted from a change in the reporting of liabilities by farmers from other credit institutions to various long—term sources. This would also explain most of the increase in long-term liabilities. c. N:$_HQLLh Net worth increased from $99,699 in 1981 to $132,665 in 1982 and decreased to $130,567 in 1983. Therefore, the increased use of debt financing has been beneficial in terms of equity for cash grain Telfarmers on average. However, these changes in net worth are based on estimated values of machinery and equipment and fixed assets. As such, changes in the market values have a direct affect on net worth. It might be noted that if machinery and equipment and buildings and improvements were valued at book value and land and residence at cost, total liabilities would have been greater than total assets in all three years, resulting in technical insolvency throughout the period. Cash_§rain_in22ms_fitat§msst§ Net farm income was negative each year, meaning that highly leveraged cash grain farms had net losses, on average over the three years analyzed. Table 3-3, on page 39 40 shows that the average net farm income for 1981, 1982 and 1983 was -$29,579, -$62,531 and -$49,285, respectively. a. W Gross profit was $135,030 in 1981. This value declined to $119,882 in 1982. In 1983, sales increased which resulted in a gross profit of $146,907. b- TQLAL.£KE§B§£§ Total expenses when adjusted for increases in prepaid expenses increased each year. The amounts spent on operating expenses were $165,544, $189,024 and $192,797 for 1981, 1982 and 1983, respectively. The increase in total expenses before prepahi expenses from 1981 to 1982 was $23,480. One reason for this increase was due to an increase in the number of tillable acres farmed. Total tillable acres (owned and rented) increased from 620 in 1981 to 694 in 1982. Of these totals, the number of rented acres increased from 436 to 510. (No increase in owned acres.) This caused land lease to increase by $11,020. Most other variable expenses increased as would be expected. ‘With the exception of rent expense, interest expense increased the most ($10,956). Total expenses continued to increase in 1983, but by only $3,771 before prepaid expenses. In 1983, the 40 TABLE 3-3: Average Income Statements On Cash Grain Farms, 1981-83 Telfarmers, For Year Ended December 31, 19xx INCOME 1981 1982 1983 $ $ 5 Sales 124813 116525 173706 Purchases 1734 420 2057 Beginning Inventory 48526 60477 64254 Ending Inventory 60477 64254 39512 Gross Profit 135030 119882 146907 EXPENSES III-I... Hired Labor 4456 6223 5926 Repairs, Maintenance, Tools 10896 11108 11035 Fuel, Oil & Grease 10321 8477 8423 Custom Hire a Lease 9344 9239 8032 Conservation 1064 592 225 Insurance 1189 1181 1416 Building 8 Land Lease 14878 25898 26970 Fertilizer & Lime 27293 28372 23004 Crop Supplies 5 Packages 995 365 369 Seed, Plants 5 Trees 8976 6963 8926 Chemicals 10080 10998 11058 Crop Marketing 1413 1206 414 Other Crop Expense 3919 3701 2011 Feed, Supplements & Additives 70 36 40 Semen a Breeding Fees 0 0 0 Veterinarian,Medicine, & Drugs 0 0 0 Livestock Marketing, Etc. 0 0 0 Livestock Supplies & Other 0 0 0 Property Taxes 4042 3948 6313 Utilities 1433 1896 1946 Interest 29595 40551 48726 Depreciation 23866 24936 26004 Miscellaneous 1714 3334 1959 Total Expenses 165544 189024 192797 Less: Increase in Prepaid Expenses -935 -66ll 3395 Adjusted Total Expenses 164609 182413 196192 NET FARM INCOME BEFORE TAXES -29579 -62531 -49285 41 major increase in expenses was due to interest expense ($8,175 increased. This increase was offset by declines in many of the variable expenses although the number of tillable acres increased to 709 (owned and rented). c. Nst_£arm_in£2me In spite of the increase in sales, gross profit and size of operations, net losses increased from 1981 to 1983. However, converting net losses to net incomes would require more than improved operating performance. F-3. W As it was pointed out at the beginning of this chapter, it is not possible to construct a representative cash flow statement based on averages because of the lack of data provided by individual cash grain farmers. Therefore, only the cash receipts and cash expenses are used in this analysis. The remainder of the cash flow statement is presented on Table 3-4 (page 42) as reported. It is not intended to be used for analytical purposes, but rather to point out some of the inconsistencies reported. The net cash incomes shown on the average cash flow summary show net cash incomes of -$18,640, -$48,308 and $4,858 for 1981, 1982 and 1983 respectively. These values indicate that no money was available to pay for family 42 TABLE 3-4: Telfarmers, For Year Ended December 31, 19xx Cash Receipts Operating Receipts Resale Items Sold Raised Livestock Sold Depreciable Livestock Sold Total Farm Cash Receipts Minus Operating Expenses (including interest) Resale Items Purchased Depreciable Livestock Purchased Total Farm Cash Expenses NET CASH INCOME Plus Machinery Sales Improvement Sales Land Sales Non-farm Capital Investment Sales Total Capital Sales Minus Machinery Purchases Improvement Purchases Land Purchases Non-farm Capital Purchases Total Capital Purchases Plus Net Non-farm Income Plus New Money Borrowed Decrease in Receivables Minus Principal Paid Increase in Receivables Decrease in Amount Owed Minus Family Living Withdrawals Plus Cash on January 1 Minus Cash on December 31 Net Change in Cash on Hand MET CASH FLOW Average Cash Flow Summary On Cash Grain Farms, 1981-83 1981 1982 1933 $ $ $ 124691 116200 173706 0 o o 83 o o o o 0 124774 116200 173706 141630 164088 166791 1734 420 2057 0 0 0 143414 164508 168848 -18640 -48308 4853 5871 7659 8875 5907 229 6964 o o 5649 0 o 0 11773 7833 21488 33871 23044 37858 10677 6361 1397 27943 0 3517 o o 0 77491 29405 47772 10886 11492 6299 201595 193211 162472 24810 13224 21520 134275 141424 131822 19512 16208 47435 -72618 -53303 -4735 12296 11664 11167 4142 5023 3456 5023 3456 20042 -881 1567 -l6586 -1402 —9627 -38145 43 labor, principal payments or capital purchases in 1981 or 1982. A small amount ($4858) was available for such purposes in 1983. Certain capital purchases were made each year as the changes in the liability structure implies. As such, it is assumed that any capital purchases were made possible by borrowing additional money. 3-4. W The financial ratios derived from the financial statements on the average highly leveraged cash grain farm for 1981-83 are provided on Table 3-5 on page 44. The liquidity ratios indicate a decline in liquidity, as measured by the current ratio. In 1983 the current ratio slipped below 1.0, meaning that current liabilities could not be entirely paid from the sale of current assets. Net working capital also shows the decline in liquidity with the continued decline from one year to the next. Profitability ratios for highly leveraged cash grain farms are representative of the poor income generation that remained throughout the period. Sales to net working capital plummetted to -12.19 because net working capital was negative in that year. Profit as percent of sales and return (”1 net worth were negative each year and worsened over the period. Gross profit and sales both declined in 1982, but grew rapidly in 1983. While growth is desirable, 44 TABLE 3-5: Average Financial Ratios On Cash Grain Farms, 1981-83 Telfarmers, For Year Ended December 31, 19xx 1981 1982 1983 LIQUIDITY RATIOS Current Ratio 1.77 1.30 0.82 Quick Ratio 0.13 0.06 0.25 Net Working Capital $ 30174 $ 18928 $ 14251 PROFITABILITY RATIOS Sales to Net Working Capital 4.14 6.16 ~12.19 Profit As Percent of Sales -0.24 -0.54 -0.28 Return on Net Worth -0.30 -0.46 -0.38 Percent Change in Gross Profit -- -0.11 0.23 Percent Change in Sales -- -0.07 0.49 Operating Ratio 1.22 1.52 1.34 Interest to Cross Farm Profit 0.22 0.34 0.33 ACTIVITY RATIOS Fixed Asset Ratio 0.38 0.31 0.47 Total Asset Turnover 0.23 0.20 0.28 LEVERAGE RATIOS Debt Ratio 0.82 0.78 0.79 Debt-to-Equity 4.48 3.42 3.82 Times Interest Earned 0.32 -0.20 1.00 4S steady increases or stability are much more favorable than volatile ups and downs. The operating ratio indicates gross profit was inadequate to cover total operating expenses in any year. Interest to gross profit increased over the period by 11%, indicating that interest is consuming a larger portion of gross profit. The activity ratios suggest that invested capital has not been used very efficiently. The large increase in the fixed asset ratio from 1982 to 1983 was probably the result of the large increase in sales volume which occurred at that time. The leverage ratios have improved slightly from 1981 to 1983. The debt ratio declined by 3%, showing a small growth in equity. Debt-to-equity also declined as would be expected with a decrease in the debt ratio. Lastly, the times interest earned ratio increased from 0.32 to 1.00. The 1.00 in 1983 means that current debt payments can just be met. 9-5. W Balance sheet figures show that the average total assets on highly leveraged cash grain farms increased from 1981-83. The annual increases however result from appreciation in the estimated values of machinery and equipment and real estate which may not be realizable values. It would seem that lenders agreed with the market 46 value estimates, assuming these assets are used as loan collateral. The result of the increase in assets and equities was a decline in the debt ratio meaning less debt for a larger business. Net farm income before taxes was negative in each of the three years, indicating concern with the ability of highly leveraged cash grain farms to repay their debts. Unless net losses can be reduced, or more favorably eliminated for the most part and cash income improved, some of the farms averaged may be forced to liquidate. The financial ratios lead to the same conclusion, but in a more concise form. G. AW 6*1- W The average balance sheet figures on highly leveraged hog farms for 1981-83 are provided on Table 3-6. The amount of total assets was virtualky unchanged from 1981 to 1983 but was about $48,000 greater in 1982 than in either 1981 or 1983. The value of total assets averaged $419,493 in 1981, $468,316 in 1982 and $420,350 in 1983. The $48,823 increase from 1981 to 1982 resulted from a combination of increases in current, intermediate and fixed assets. The $10,765 increase 47 TABLE 3-6: Average Balance Sheets On Bog Farms, 1981-83 Telfarmers, For Year Ended December 31, 19xx ASSETS Current Assets ---..--.-- I.- Cash Crops Feed Supplies Purchased Feeders Feeder Pigs Market Bogs Total Current Assets Intermediate Assets .--.-----------...- Accounts Receivable Sows Gilts Boars Machinery 5 Equipment (Market Value) Non-farm Business Assets Household Assets Total Intermediate Assets Fixed Assets Estimated Value of Real Estate TOTAL ASSETS LIABILITIES 8 NET WORTH Current Liabilities Accounts Payable Production Credit Association Banks Farmers Home Administration Total Current Liabilities Intermediate Liabilities .IIIICIIICIIIIICCIIISSSI Merchants & Dealers Production Credit Association Banks Farmers Home Administration Other Credit Institutions Total Intermediate Liabilities Long-term Liabilities Banks Farmers Home Administration Insurance Companies Individuals Federal Land Banks Total Long-term Liabilities TOTAL LIABILITIES Net Worth TOTAL LIABILITIES & NET WORTH 1981 1982 -----.- .--.-.. S $ 3590 3777 3941 4697 44582 48973 347 205 3970 128 981 1525 39791 48662 97202 107967 3175 3251 17208 19518 8395 14208 3146 3561 150581 158740 0 0 1000 1000 183505 200278 138786 160071 419493 468316 1413 721 12066 12782 4620 4500 8925 9052 27024 27055 466 377 48265 51130 16939 16500 28263 28664 478 10172 94411 106843 9240 9000 37188 37716 0 0 34525 34359 64662 66730 145615 147805 267050 281703 152443 186613 419493 169045 163118 420350 315282 105068 48 in current assets was due primarily because of an increase lJl‘the value of market hogs. Intermediate assets increased by $16,773 in 1982. Note that all intermediate assets except household assets showed increases in 1982 over 1981. Also note the largest increase in 1982 was in the market value of machinery and equipment which is only an estimate. The estimated value of real estate also increased. The $21,285 increase in the estimated value of real estate was partially due to purchases of improvements, but more of the increase was based on appreciation of fixed assets. Total assets declined in 1983 to $420,350 because of substantial declines in both current and inter- mediate assets. Current assets declined $19,780 in 1983. This decline resulted mainly because of a $14,519 decrease in the value of feed. This may have resulted from lower inventories and/or prices. Intermediate assets declined by $31,233. This resulted from declines in all intermediate assets, except for the value of gilts. As in 1982, the largest change was in the estimated value of machinery and equipment. The $23,919 decline in the value of machinery and equipment is assumed to reflect declines due to depreciation and market values. 49 To offset the declines in current and intermediate assets long-term assets increased, but the $3,047 increase hardly influences the other declines. b- MW Total liabilities increased continuously throughout the period. Total liabilities were $267,050, $281,703, and $315,282 in 1981, 1982 and 1983. These increases are sums of increases of each class of liability. The increase in total liabilities of $14,653 in 1982 was fueled mostly from the $12,432 increase in intermediate liabilities. This increase was due to increased amounts owed to the Production Credit Association, Farmers Home Administration and other credit institutions. Of these, Others increased the most which may just be because of poor accounting on the part of some Telfarmers. The remainder of the increase in total liabilities was caused by a $2,190 increase in long-term liabilities, which resulted mostly from increased amounts owed to the Federal Land Banks. The amount of total liabilities increased by $33,579 to $315,282 in 1983. Current liabilities 50 increased $2,124. Intermediate liabilities increased $6,113. Long-term liabilities increased $25,342. The small increases in current and intermediate liabilities is of little concern. It was the increase in long-term debt that really pushed the debt level up in 1983. From the balance sheet, it can be seen that all long-term lenders had increased amounts owed to them, particularly individuals. Because no other lenders had declines, this increase is not due to a change in creditors. In addition, an average increase of 48 acres was reported in 1983. This would imply that one or more of the farmers purchased land on a land contract in 1983. This is in fact true and will be evident in the following chapter when the hog farm case is presented. 0. W As a result of increased debt, combined with the increase in total assets, net worth increased from $152,443 in 1981 by $34,170 to $186,613 in 1982. This value decreased in 1983 by $81,545 to $105,068 for two reasons. One was the decline in the value of total assets. The other was the increase in the amount of total debt. 51 6-2- a9s_£srm_ln29ms_fitstsmsnts Net farm income before taxes was negative in 1981 (-$24,241): positive in 1982 ($34,900) and negative in 1983 (-$l7,085). Table 3-7 on page 52 shows the average income statements on highly leveraged hog farms from 1981-83. a. W Cross farm profit increased from $186,520 in 1981 to $275,448 in 1982. This increase of $88,928 in 1982 was attributed to a $59,535 increase in sales. The remainder of this increase resulted from declines in purchases ($2,880) and beginning inventories ($7,381). b. W Adjusted total expenses increased by $29,787 from 1981 to 1982. This value declined by $2,365 in 1983. The increase in 1982 appears to have occurred for three reasons. One was an expansion in crop production, as evidenced by increases in repairs and maintenance, fuel, custom hire and lease, seed, chemicals and other crop expense. The second reason was increased amounts spent on livestock. This can be substantiated by increased feed, veterinarian, livestock supplies and utilities. The third reason for the increase in 1982 was because property taxes and interest expense increased. This would imply some land purchases in 1982. The number of owned 52 TABLE 3-7: Average Income Statements On Bog Farms, 1981-83 Telfarmers, For Year Ended December 31, 19xx INCOME 1981 1982 1983 S $ $ Sales 200022 259557 250057 Purchases 6121 3241 3702 Beginning Inventory 129467 122086 141763 Ending Inventory 122086 141218 116506 Gross Profit 186520 275448 221098 EXPENSES III-I..- Hired Labor 9291 8886 10061 Repairs, Maintenance, Tools 10380 11879 9255 Fuel, Oil & Grease S684 6570 5729 Custom Hire a Lease 2662 4625 4132 Conservation 499 823 79 Insurance 1431 1455 1442 Building a Land Lease 6234 7643 9495 Fertilizer & Lime 18308 15334 13433 Crop Supplies 5 Packages 300 64 46 Seed, Plants 8 Trees 5777 7363 3668 Chemicals 5419 7670 4698 Crop Marketing 584 740 526 Other Crop Expense 2164 2983 2326 Feed, Supplements & Additives 72568 80972 96845 Semen & Breeding Fees 0 0 0 Veterinarian,Medicine, & Drugs 4583 8071 8123 Livestock Marketing, Etc. 652 799 729 Livestock Supplies & Other 506 752 1170 Property Taxes 4270 7802 5883 Utilities 2393 3348 2477 Interest 32770 36458 31836 Depreciation 21735 22646 23538 Miscellaneous 2501 3522 2819 Total Expenses 210711 240405 238310 Less: Increase in Prepaid Expenses 50 143 -127 Adjusted Total Expenses 210761 240548 238183 NET FARM INCOME BEFORE TAXES -24241 34900 -17085 53 acres was reported to have increased from 242 in 1981 to 390 in 1982. Therefore, it is assumed that property taxes and interest went up in 1982 because of land purchases. The small decline in total expenses during 1983 looks as though it resulted for one thing from a shift in crop production for feed to purchased feed. Some proof of this is the decline in all crop related expenses except hired labor (which may increase for other reasons) and building and land lease. Other evidence is the $15,873 increase in the amount of purchased feed. The net change between crop product- ion expenses, which includes expenses on the income statement from hired labor to other crop expenses and feed, supplements and additives expense was an increase of $4,728. Property taxes declined by nearly $2,000 in 1983 probably because of tax deferment assuming the farmers who purchased land enrolled in P.A. 116 (Farmland Preservation Act). The other significant change in expenses that occurred in 1983 was a $4,622 drop in interest expense. This may have occurred because one or more of the farms missed some interest payments and/or 54 certain loans were renegotiated at lower interest rates. c. Nst_£srmtlnssms The changes that occurred in gross profit and operating expenses led to improved profitability over the period, with the best year being 1982. The $34,900 of net farm income in 1982 was directly related to the market price of hogs increasing in that year. In addition, crop prices fell which would reduce total feed costs per hog. G-3- W The average net cash income on highly leveraged hog farms was $4,859, $38,499 and $31,370 in 1981, 1982 and 1983, respectively. Consecutive positive values mean that these amounts were available to pay for family labor, principal payments and capital purchases. Table 3-8 on page 55 shows the cash flow summary for highly leveraged hog farms from 1981-83. The $33,640 increase in net cash income in 1982 was the result of increased cash from operations combined with more value from sales of raised livestock, both of which are due to higher hog prices. To offset the increase in cash receipts, operating expenses increased $28,843. In 1983 net cash income declined some ($7,129) because resale items and raised livestock sold both fell as a 55 TABLE 3-8: Average Cash Flow Summary On Hog Farms, 1981-83 Telfarmers, For Year Ended December 31, 19xx Cash Receipts Operating Receipts Resale Items Sold Raised Livestock Sold Depreciable Livestock Sold Total Farm Cash Receipts Minus Operating Expenses (including interest) Resale Items Purchased Depreciable Livestock Purchased Total Farm Cash Expenses NET CASH INCOME Plus Machinery Sales Improvement Sales Land Sales Non-farm Capital Investment Sales Total Capital Sales Minus Machinery Purchases Improvement Purchases Land Purchases Non-farm Capital Purchases Total Capital Purchases Plus Net Non-farm Income Plus New Money Borrowed Decrease in Receivables Minus Principal Paid Increase in Receivables Decrease in Amount Owed Minus Family Living withdrawals ‘Plus Cash on January 1 Minus Cash on December 31 Net Change in Cash on Hand NET CASH FLOW 1981 1982 1983 S S 5 169246 209286 220042 11030 8002 2612 17531 40627 25322 2152 1583 1867 199959 259498 249843 189052 217895 215924 2442 943 1142 3606 2161 1407 195100 220999 218473 4859 38499 31370 6613 421 564 0 0 0 0 0 0 0 0 0 6613 421 564 15072 17678 9742 995 3731 6435 0 0 0 0 0 0 16067 21409 16177 2802 3541 7460 159154 162368 189577 302 16 127 149266 176929 184612 174 28 171 -10016 14573 -4921 15737 17230 23232 1707 3590 3777 3590 3777 2966 -1883 -187 811 -9397 -10938 5717 56 result of lower hog prices. To help improve the decline in cash receipts, cash expenses also declined primarily because of lower operating expenses. The remainder of the cash flow summary is for illustrative purposes only. No meaningful analysis can be made from negative cash flows. And as stated earlier, it is not possible to reconcile negative cash flows from averages without double entry accounting. G-4. W The average financial ratios on highly leveraged hog farms for 1981-83 are given in Table 3-9 on page 57. The liquidity ratios all showed increased liquidity from 1981 to 1982. The reason for the increase was the increase in cash and other current assets. All liquidity ratios declined in 1983 below the ratios for 1981, indicating a decline in liquidity over the period. The reason for the declines in 1983 are due to a combination of both a decrease in the amount of current assets and an increase in the amount of current liabilities. On the positive side, the current ratios indicate that current assets could cover current liabilities more than three times in any one year. Net working capital shows that when current assets were sold to pay current liabilities adequate amounts remained each year for other purposes. 57 Average Financial Ratios On TABLE 3-9: Bog Farms, 1981-83 Telfarmers, For Year Ended December 31, 19XX LIQUIDITY RATIOS Current Ratio Quick Ratio Net Working Capital PROFITABILITY RATIOS Sales to Net Working Capital Profit As Percent of Sales Return on Net Worth Percent Change in Gross Profit Percent Change in Sales Operating Ratio Interest to Gross Farm Profit ACTIVITY RATIOS Fixed Asset Ratio Total Asset Turnover LEVERAGE RATIOS Debt Ratio Debt-to-Equity Times Interest Earned 1981 3.60 0.13 $ 70178 2.85 -0e12 -0e16 1.13 0.18 1982 3.98 0.14 $ 80732 3.22 0.13 0.19 0.13 1983 3.02 0.10 59008 4.24 '0.07 '0.16 -Oezo -0.04 1.08 0.14 1.53 0.59 0.75 3.00 1.49 58 Profitability ratios produced somewhat mixed signals. Sales to net working capital increased continuously which can be interpreted as an increase in business volume. Profit as percent of sales was negative in 1981 and 1983 because of net losses in those years. It was also quite volatile because of the wide variation in sales and net income. Return on net worth was unchanged over the period because the decline in net worth was proportional to the decline in net loss. Both the percent change in gross profit and percent change in sales declined in 1983 when compared to 1982. The degree of volatility is of some concern here because these wide changes raise the question as to whether the level of gross profit and sales are sustainable over several years. The operating ratios reflect the fact that net income was earned only in 1982. Interest to gross profit declined by 4% over the period because interest expense declined slightly from 1981 to 1983, while gross profit increased. Both activity ratios increased from 1981 to 1983. This would suggest that invested capital was used more efficiently throughout the period. The decline of the fixed asset ratio from 1982 to 1983 was the result of a decline in sales combined with an increase in the estimated value of fixed assets. 59 The leverage ratios indicate a pattern of decreased long—term solvency. The debt ratio increased from 64% in 1981 to 75% in 1983. The debt-to-equity ratio increased from 1.75 to 3.00 over the same time. These increases represent a higher degree of leverage when debt is compared to assets or equity. The times interest earned ratio increased from 1981 to 1983. This increase means that the ability of highly leveraged hog farms to meet current debt obligations improved over the period. G-5- W The balance sheet figures have shown that while total assets remained constant, total liabilities increased. This has increased the degree of leverage. Leverage as measured by the debt ratio increased from 0.64 to 0.75 over the period. Remember that the value of total assets is based on market values of machinery and equipment and real estate. Therefore, whenever market values decline as they have 1J1 the recent past, the amount of total assets will decline. Holding constant liabilities, net worth will also decline. Net losses were reduced and 1982 even saw $34,900 in net income. The inability to maintain steady growth in net income raises questions about the continued ability of highly leveraged hog farms to earn enough profit to pay off debts in the long-run. 60 The financial ratios summarize the changes in profitability and increase in debt. Examination of the ratios alert one to the concern over the ability to pay back loans and improve long-term solvency. H. 3"]. e According to the value of total assets, the average highly leveraged dairy farm declined by $14,461 from $581,383 in 1981 to $566,922 in 1983. The value of total assets in 1981 and 1982 were nearly identical with 1982 showing a value of $581,876. Table 3-10 on page 61 provides information on the average balance sheets of highly leveraged dairy farms from 1981-83. There was no significant change in the value of total assets during 1982, although the composition of the asset structure changed. Current assets declined by $5,035 primarily because of a decline in the value of feed, which was due to lower prices associated with various feed stuffs. Intermediate assets also declined in 1982. The $9,723 decline was mostly due to lower values per dairy cow (dairy herd size was unchanged) and a decline in the estimated market value of machinery and equipment. These declines were 61 TABLE 3-10: Average Balance Sheets On Dairy Farms, Telfarmers, For Year Ended December 31, 19XX ASSETS Current Assets Cash Crops Feed Supplies Dairy Steers Beef Calves Beef Steers-Raised Total Current Assets Intermediate Assets Accounts Receivable Dairy Cows Dairy Heifers (all) Dairy Bull Dairy Calves Beef Cow Beef Heifers (all) Beef Bull Machinery 5 Equipment (Market Value) Non-farm Business Assets Household Assets Total Intermediate Assets Fixed Assets Estimated Value of Real Estate TOTAL ASSETS LIABILITIES 5 NET WORTH -.--.--.--.-.-I---I--II Current Liabilities .I-IUIIIIICIIII-ICI Accounts Payable Production Credit Association Banks Farmers Home Administration Total Current Liabilities Intermediate Liabilities CIIIIIII-ICIIIIISIIIIIII Merchants & Dealers Production Credit Association Banks Farmers Home Administration Other Credit Institutions Total Intermediate Liabilities Long-term Liabilities Biiliiiijl-IOHIBIII-I Banks Farmers Home Administration Insurance Companies Individuals Federal Land Banks Total Long-term Liabilities TOTAL LIABILITIES Net Worth TOTAL LIABILITIES 8 NET WORTH 1981-83 19‘1 1982 1983 $ 5 $ 406 531 146 1455 1809 1652 40522 36152 39742 1400 1417 1734 778 1571 1556 274 79 274 106 141 124 44941 39909 43274 9683 12294 12285 95743 89234 85294 35273 34677 27966 1006 1381 971 5378 5111 5228 641 300 344 212 335 571 88 141 111 118334 113256 103321 1696 1602 1509 0 0 0 268054 258331 237600 268388 283636 286048 581383 581876 566922 1098 1189 2926 7224 6711 6086 2900 1941 7560 18025 18399 18829 29247 28240 35401 8887 2899 1768 28898 26843 24349 10632 7119 27719 57078 58262 59626 12787 28616 14304 118282 123739 127766 5799 3883 15120 75103 76661 78456 449 172 494 62263 67601 76167 99834 110462 120168 243448 258779 290405 390977 410758 453572 190406 171118 113350 581383 581876 566922 62 offset by a $15,248 increase in the estimated value of real estate. During 1983 the value of total assets declined by $14,954 from the previous year. This decline was also a result of changes in the asset structure. While current and fixed assets increased by $3,368 and $2,412, respectively, intermediate assets fell by $17,246. The reason that intermediate assets decreased by so much was the value of dairy cows (no change in herd size), dairy heifers and the estimated market value of machinery and equipment all fell $4,000 to $10,000 each. b- M Total liabilities increased continuously throughout the period. Total liabilities were $390,977, $410,758 and $453,572 in 1981, 1982 and 1983, respectively. In 1982, total liabilities crept upward by $19,781. Most of the increase is attributable to increased long-term debt ($15,331). There was at least one land purchase made in 1982, as evidenced by dairy case (Chapter IV). The remaining increase in total debt resulted from a $5,457 increase in intermediate liabilities. This was the net change that occurred from payments to Merchants and Dealers, 63 the Production Credit Association and Banks, combined with additional borrowing from the Farmers Home Administration and other credit institutions. The increase in total liabilities during 1983 was $42,814. This is the sum of increases in current, intermediate and long-term liabilities. Current liabilities showed a small amount of additional borrowing from the Farmers Home Administration and due on accounts, but the additional amount of $5,619 borrowed from Banks was most significant. The largest increase owed intermediate term lenders was also to Banks ($20,600 increase). This increase was offset by a $14,312 decrease in the amount owed to other credit institutions. However, these changes in intermediate liabilities may only be the result of more accurate reporting in 1983. That is, some farmers averaged may have reported some amounts owed to Banks in 1982 without providing the creditors' names, then in 1983 they may have provided the missing names, which would cause the shift between Banks and other credit institutions. The largest portion of the increase in total liabilities in 1983 was by far the $31,626 increase in long-term liabilities. Banks increased by $11,237, which may be due to data reporting as explained above 64 because the amounts owed creditors short-term (current), intermediate and long-term is a percentage of the total bank borrowing. (See Chapter II, Table 2-1 for percentages of amounts owed creditors by maturity.) Amounts owed Individuals increased $8,566. The Federal Land Bank debt increased $9,706. The amounts owed to Insurance Companies and the Farmers Home Administration also increased, but by much smaller amounts. Because no land purchases were made in 1983, it is assumed that the increases in long-term debt resulted from refinancing existing assets and/or converting unpaid interest to principal. c. H§§_H2L£h Net worth declined each year. The total decline over the three year period was $77,056. The rate of decline accelerated in 1983 because net worth was squeezed from both ends as total assets declined and total liabilities increased. ID: order for net worth to improve, changes are necessary which will increase asset values and/or decrease liabilities. H-2. W Average net farm income before taxes was negative each year. Net farm incomes were -$12,169, -$ll,151 and -$10,114 for 1981, 1982 and 1983, respectively. Table 3-11 65 on page 66 shows the average income statements on highly leveraged dairy farms for 1981-83. a. W Gross farm profit was $160,787 in 1981. This value increased to $165,696 in 1982 even though there was a negative change in inventory because sales increased. This may be an indication of some liquidation in order to satisfy creditors. Although sales were virtually unchanged from 1982 to 1983, gross farm profit increased to $168,015. This increase was again due to the negative change in inventory. Note that continuous increases can not be sustained with no growth in sales, while depleting inventories because a certain amount of inventory is necessary to maintain operations from one production year to the next. For example, if feed crops are sold which are needed for livestock, then additional feed will have to be purchased. This scenario may improve sales, but it would also increase feed purchases (an operating expense), which may or may not hamper net income, depending on crop and feed prices. b. ot x ns 5 Total expenses increased moderately each year. The increase in 1982 was $3,891 and in 1983 was $1,282. 66 TABLE 3-11: Telfarmers, For Year Ended December 31, 19xx INCOME Sales Purchases Beginning Inventory Ending Inventory Gross Profit EXPENSES Hired Labor Repairs, Maintenance, Tools Fuel, Oil & Grease Custom Hire & Lease Conservation Insurance Building a Land Lease Fertilizer & Lime Crop Supplies 5 Packages Seed, Plants 8 Trees Chemicals Crop Marketing Other Crop Expense Feed, Supplements & Additives Semen & Breeding Fees Veterinarian,Medicine, & Drugs Livestock Marketing, Etc. Livestock Supplies 5 Other Property Taxes Utilities Interest Depreciation Miscellaneous Total Expenses Less: Increase in Prepaid Expenses Adjusted Total Expenses NET FARM INCOME BEFORE TAXES 1981 $ 175444 7794 178721 171858 160787 9263 11099 8120 2426 200 2184 3937 11465 227 3230 3038 372 605 40158 1403 2867 6646 4141 4054 4113 30441 21739 1247 172975 -19 1982 $ 180246 9812 171858 167120 165696 8584 10874 7366 2521 213 1967 4475 6926 335 3664 2217 87 504 39742 1865 2981 7101 4621 5458 4369 36778 22773 1443 176864 -17 -11151 Average Income Statements On Dairy Farms, 1981-83 1983 $ 180625 9340 167120 163850 168015 7828 10347 6243 1961 152 2142 3530 8608 235 3615 1941 191 261 38303 1398 3479 10532 4778 5961 4488 37446 23702 1319 178460 -331 67 In 1982, most of the crop expenses declined, which would indicate less acres harvested. Actually, total tillable acres harvested increased an average of 17 acres. This explains why land lease, crop supplies and seed expenses increased in 1982. Of the feed crops harvested, acres of corn and barley declined 23 and 2 acres, respectively. Corn silage, oats and hay equivalents increased 16,11 and 5 acres, respectively. The decline in crop expenses led to lower yields per acre for all crOps except corn. The change in acres harvested per crop caused total production to decline for corn and barley, while production of corn silage, oats and hay equivalents increased. To compensate for the changes in production, more corn, oats and hay equivalents were purchased. Fortunately, prices of these feeds declined, so purchased feed expense declined. All livestock expenses increased by small amounts. In fact, the total increase spent on breeding fees, veterinarian, marketing and livestock supplies was only $1,511. Property taxes, utilities, interest, depreciation and miscellaneous expenses also increased. With a $6,337 increase, interest expense had the largest 68 increase in 1982. This is attributable to the land purchased, which also explains the increase in property taxes. This pattern of changes in expense items continued in 1983, but for different reasons. In 1983 all crop expenses except fertilizer and lime and crop marketing declined. These declines occurred for two reasons. One was the average number of tillable acres (owned and rented) declined from 346 to 325. The other was that 37 acres (23 owned and 14 rented) were put into land diversion. The decline in acres harvested was similar to the declines in 1982. The difference in 1983 being, corn, corn silage, oats and barley declined by an average of 35, 10, 18 and 2 acres, respectively. Only acres of hay equivalents showed any increase and it was minor (4 acres). Again as in 1982, the change in crops harvested per acre caused total production to decline for all feeds, except hay equivalents. This lead to purchasing feed and drawing down feed crop inventories which was not done in 1982. In fact, in 1982 all feed crop inventories except for hay equivalents increased. All livestock expenses increased in 1983 except for purchased feed, which declined slightly because of the inventory adjustments and semen and breeding fees 69 expense, which decreased by $467. This translates into an increase in livestock expenses (excluding .purchased feed) of $3,619 in 1983. The increase in 1983 was almost entirely due to $3,431 more spent on livestock marketing, which includes trucking. As was the case in 1982, property taxes, utilities, interest and depreciation expenses increased in 1983. Contrary to 1982, interest expense increased by a small amount ($668). c. Usi_£srm_1nssms The result of the changes in the income and expense items was a decline in the amount of net loss by about $1,000 per year. This is not a substantial improvement, but is a move in the right direction. In addition, it can not be overlooked that without generating net incomes and positive cash flows on a regular basis, creditors may begin to impose credit restrictions on the farm. 3-3. W Net cash income on the average dairy farm saw little change from 1981-83. This is common with dairy farms because milk prices do not fluctuate like crop and livestock prices due to the milk marketing order. As can be seen on Table 3-12, the average cash flow summary for highly leveraged dairy farms shows net cash incomes of 70 TABLE 3-12: Telfarmers, Cash Receipts Operating Receipts Resale Items Sold Raised Livestock Sold Depreciable Livestock Sold Total Farm Cash Receipts Minus Operating Expenses (including interest) Resale Items Purchased Depreciable Livestock Purchased Total Farm Cash Expenses NET CASH INCOME Plus Machinery Sales Improvement Sales Land Sales Non-farm Capital Investment Sales Total Capital Sales Minus Machinery Purchases Improvement Purchases Land Purchases Non-farm Capital Purchases Total Capital Purchases Plus Net Non-farm Income Plus New Money Borrowed Decrease in Receivables Minus Principal Paid Increase in Receivables Decrease in Amount Owed Minus Family Living Withdrawals Plus Cash on January 1 Minus Cash on December 31 Net Change in Cash on Hand NET CASH FLOW Average Cash Flow Summmary On Dairy Farms, 1981-83 For Year Ended December 31, 19xx 1981 1982 1983 $ $ $ 162706 162686 165214 460 174 0 6276 12421 10399 5994 4898 4932 175436 180179 180545 151234 154091 154759 84 138 417 7710 9673 8922 159028 163902 164098 16408 16277 16447 1256 1635 402 0 0 0 0 0 0 0 0 0 1256 1635 402 17747 12508 8242 9043 14398 3338 37471 0 3506 0 0 0 64261 26906 15086 1963 1237 2042 111571 89166 111313 2890 3578 3220 70063 92047 102639 2420 3525 1509 -41978 2828 -10385 29545 25832 27211 201 406 531 406 531 146 -205 -125 385 -32406 -36542 71 $16,408, $16,277 and $16,447 in 1981, 1982 and 1983, respectively. In 1982, the value of raised livestock sold increased $6,145, which caused total cash receipts to increase. However, operating expenses and purchases also increased, which caused cash expenses to increase in proportion to the increase in cash receipts. Although cash operating receipts and sales of depreciable livestock increased in 1983, sales of resaleable items and raised livestock declined. In addition, cash operating expenses and resale items purchased increased slightly, while depreciable livestock purchased fell. The net result of these changes in cash receipts and expenses was a net cash income of $16,447. The other items listed on the average cash flow statements can not be analyzed with any confidence because of the problems addressed at the beginning of this chapter. H-4. W The average financial ratios on highly leveraged dairy farms are provided on Table 3-13 on page 72. The liquidity ratios show continued declines in liquidity throughout the period. Even so, the current ratio and net working capital show that current assets were sufficient to cover current liabilities each year. 72 TABLE 3-13: LIQUIDITY RATIOS Current Ratio Quick Ratio Net Working Capital PROFITABILITY RATIOS Sales to Net Working Capital Profit As Percent of Sales Return on Net Worth Percent Change in Gross Profit Percent Change in Sales Operating Ratio Interest to Gross Farm Profit ACTIVITY RATIOS Fixed Asset Ratio Total Asset Turnover LEVERAGE RATIOS Debt Ratio Debt-to-Equity Times Interest Earned Average Financial Ratios On Dairy Farms, 1981-83 Telfarmers, For Year Ended December 1981 1.54 0 01 S 15894 0.67 2.05 0.63 1982 15.45 -0.06 -0.07 0.03 0.03 1.07 0.21 0.71 2.40 0.77 31, 19XX 22.94 -0.06 -0.09 0.01 0.00 1.06 0.21 0.63 0.32 0.80 4.00 0.77 73 The profitability ratios show little sign of improvement from 1981 to 1983. Sales to net working capital increased partly because sales increased, but mostly because liquidity as measured by net working capital decreased. Profit as percent of sales was negative each year, but improved slightly because net losses declined and sales increased. Return on net worth was also negative each year and worsened because although losses were less, net worth declined. The growth in gross profit as measured by the percent change in gross profit was positive, but by very small amounts. The percent change in sales showed a 3% rate of growth in 1982, but none in 1983. The operating ratio was greater than 1.00 each year, meaning that expenses were greater than gross profit but the decline from 1.08 in 1981 to 1.06 in 1983 is an improvement. This improvement resulted from increased gross profit. And even with the increase in gross profit, interest expense grew at a faster rate causing interest to gross profit to increase from 1981 to 1983. The activity ratios reflect the change in asset values in relation tn) sales. The fixed asset ratio had 1% declines each year because sales and the value to fixed assets both increased, with asset values increasing faster. Just the opposite is true of the total asset turnover. It 74 increased 1% per year because total asset values fell over the period. The leverage ratios show the increase in debt in relation to total assets and equity, as measured by the debt and debt-to-equity ratios, respectively. The times interest earned ratio increased primarily because of the increase in interest expense over the period, which caused net losses to increase and net cash income to decrease. 8-5- WWW Balance sheet figures show a decline in the value of total assets on the average highly leveraged dairy farm from 1981 to 1983. In addition, if the market values of machinery and equipment and real estate decline in the future, total assets will also decline because it is unlikely that these farms could offset any declines by expanding current or intermediate assets and certainly not with fixed assets, unless a source of outside equity could be found or asset values appreciate. To compound the decline in assets, liabilities increased each year causing net worth to decline. This analysis also showed that average net farm incomes were negative throughout the period. Even though these losses declined, they were less because of attempts to improve profitability, while jeopardizing the staying power of the business. That is, unless net losses can be 75 eliminated by means other than continued depletion of inventories and positive cash flows achieved, some highly leveraged dairy farms may find their existence will be short lived. I. W From the analyses of the cash grain, hog and dairy farm types it is apparent that, on average, none of these highly leveraged enterprises are in stable condition. Each has experienced different changes over the period of 1981 to 1983. Balance sheets showed that all three farm types had increased liabilities, while total assets increased on cash grain farms; were unchanged on hog farms and declined on dairy farms. Income statements indicate that cash grain farms produced greater losses; hog farms had improved profitability and dairy farms had little change in net losses. The reasons these farms changed as they did is not clear because of working with averages. However, while this chapter is not intended to provide specific answers to determine what alternatives are available to the average farm with high debt levels, it is hoped the reader now has a framework of what each enterprise does and how it has performed on average. A. Muslim The case farms were selected from the farms used to construct the average financial statements in Chapter III. In addition to being highly leveraged and having data from 1981-83, the farms chosen as case examples have Telfarm records which are very similar to the average financial statements of the last chapter. By selecting farms with records supportive of the averages, it is hoped that these case farms are most representative of their respectiwe groups. The three case studies analyzed in this chapter will provide the reader with an understanding of what financial alternatives might be considered, given specific circum- stances of an individual farm. To assure the alternatives are based on data as accurate as possible, the case farm financial statements include records for 1984. For each case, the 1984 ending financial statements were used for simulation. H. Case study ijgctives The objectives of this chapter are to: 0 identify any trends existing and/or developing within the case farms. 76 77 0 consider several alternatives for each case to improve net income, cash flow and long-term solvency. o simulate future financial performance of case farms to determine what alternative or combination of alternatives will produce the most favorable results. c. Qrssnizatisn This chapter is organized similar in fashion to the previous chapter. Each case is presented separately. First, the historical financial statements are presented for each case. Secondly, a base run simulation is explained for each case, demonstrating the future financial outcome. 'Thirdly, the alternatives which were attempted for each farm are stated and evaluated with their respective outcomes. Lastly, recommendations as to which alternative to implement are made, given the limitations of the data and simulation capabilities. D. Analysis of Case Study gash grain Farm The cash grain farm is technically classified as a Saginaw Valley farm type. It has usually produced corn, wheat, sugar beets and soybeans. Currently, the farm consists of 850 acres. Three hundred and thirty-five acres are owned and the remaining 515 are being rented. All acreage is reported as tillable. Land rent is paid on a share rent basis. The landlord/operator proportion on land rented was not determined in the analysis. 78 n-l. 93W 3. m The value of total assets was greater than $1,000,000 in each year included in the analysis. Table 4-1 on page 79 shows the balance sheets as reported from 1981 to 1984. There was a $113,725 decline in total assets during 1982 primarily because the estimated value of real estate fell by $123,000. The decline resulted from declining market values because no real estate was sold at that time. The values of current and intermediate assets increased $4,275 and $5,000 respectively. Since 1982, current and intermediate asset values have increased, while fixed asset values have remained constant. Current assets increased because of substantial increases in crop inventory values. Intermediate assets increased because of continued replacements of machinery and equipment. The net change in total assets from 1981 to 1984 was a $54,175 decline. Note however, if the prices associated with crops, the estimated market value of machinery and equipment and/or real estate are inaccurate (too high, more likely than too low) then 79 TABLE 4-1: ASSETS Current Assets Cash Crops Feed Supplies Total Current Assets Intermediate Assets Accounts Receivable Machinery 5 Equipment (Market Value) Non-farm Business Assets Household Assets Total Intermediate Assets Fixed Assets Estimated Value of Real Estate TOTAL ASSETS LIABILITIES 8 NET WORTH Current Liabilities Accounts Payable Production Credit Association Banks Farmers Home Administration Total Current Liabilities Intermediate Liabilities IIIIICIfl-IIIIIIIIIIIIIII Merchants & Dealers Production Credit Association Banks Farmers Home Administration Other Credit Institutions Total Intermediate Liabilities Long-term Liabilities Banks Farmers Home Administration Insurance Companies Individuals Federal Land Banks Total Long—term Liabilities TOTAL LIABILITIES Net Worth TOTAL LIABILITIES & NET WORTH Balance Sheets On Cash Grain Farm Case, 1981-84 Telfarmers, For Year Ended December 31, 19xx 1981 1982 1983 1984 $ $ $ $ 5000 2000 1000 1000 35825 47700 48600 96750 0 0 22750 0 13100 8500 12500 0 53925 58200 84850 97750 0 0 0 0 175000 180000 200000 200000 0 0 0 0 0 0 0 0 175000 180000 200000 200000 933000 810000 810000 810000 1161925 1048200 1094850 1107750 0 0 0 0 0 0 0 0 84008 173075 122489 116349 0 0 0 0 84008 173075 122489 116349 2859 1122 1122 1122 0 ~ 0 0 0 23193 47202 33406 31731 0 0 0 0 23684 18734 136 0 49736 67058 34664 32853 52574 94405 66812 63463 0 0 0 0 0 0 0 0 521760 463660 451060 438960 160202 159278 158234 157065 734536 717343 676106 659488 868280 957476 833259 808690 293645 90724 261591 299060 1161925 1048200 1094850 1107750 farm. 80 the value of total assets may not be realizable. But for now, they are taken as given. b. We Total liabilities on this farm declined from $868,280 in 1981 to $808,690 in 1984. Both intermediate and long-term debt showed declines over the period, while current liabilities increased. This shift in the liability structure most likely put increased drain on an already troubled cash flow. c. W The amount of net worth increased slightly over the period, but had a major decline in 1982 which resulted from the decline in the estimated market value of real estate and from increased borrowing at banks. In 1983, net worth increased to nearly what it had been in 1981 because of increases in the value of current and intermediate assets and because of declines in total liabilities. Nineteen hundred and eighty-four showed changes similar to 1983 with assets again increasing as liabilities decreased. -- n Net losses were generated each year by the cash grain Table 4-2 on page 81 shows the income statements of 81 1983 $ 174406 3000 47700 71350 195056 2320 12790 11578 20251 526 24688 1419 1674 ' 18767 00000 18472 2995 107622 29090 2618 -4000 TABLE 4-2: Income Statements On Cash Grain Farm Case, 1981-84 Telfarmers, For Year Ended December 31, 19xx INCOME 1981 1982 $ $ Sales 209948 118792 Purchases 0 0 Beginning Inventory 36080 35825 Ending Inventory 35825 47700 Gross Profit 209693 130667 EXPENSES Hired Labor 1169 2613 Repairs, Maintenance, Tools 12321 15782 Fuel, Oil & Grease 15957 10522 Custom Hire a Lease 14911 17826 Conservation 0 0 Insurance 1187 785 Building a Land Lease 13300 0 Fertilizer & Lime 23610 25253 Crop Supplies & Packages 16 0 Seed, Plants 5 Trees 9143 498 Chemicals 15732 9632 Crop Marketing 240 0 Other Crop Expense 0 0 Feed, Supplements & Additives 0 0 Semen & Breeding Fees 0 0 Veterinarian,Medicine, & Drugs 0 0 Livestock Marketing, Etc. 0 0 Livestock Supplies 5 Other 0 0 Property Taxes 9128 7607 Utilities 3290 3170 Interest 71452 69430 Depreciation 31202 35189 Miscellaneous 654 3576 Total Expenses 223312 201883 Less: Increase in Prepaid Expenses -6100 4600 Adjusted Total Expenses 217212 206483 NET FARM INCOME BEFORE TAXES -7519 -75816 1984 $ 178409 0 71350 96750 203809 2967 16294 12730 7492 1357 21204 3877 14575 00000 13087 3303 77357 29681 753 12500 82 this farm from 1981 to 1984. Losses increased greatly in 1982 and have declined since. The major cause of the large loss in 1982 was the dramatic decline in sales in that year. Lower sales were due to fewer tillable acres farmed and lower prices received per unit. To partially offset the reduction in sales dollars, total expenses were reduced. The most significant decline in expenses was building and land lease. The reason for this is simply no value was reported by the farmer. This farmer leases land on a share rent basis and has not reported the landlord's share as an expense since 1981. This also explains why no values are given for 1983 and 1984. From the data it appears there is no proportion of operator/landlord share per se. For example, some crops grown on rented land go entirely to the operator. In other cases the landlord has received total production. Still others are divided between the two parties, but with no specific ratio. Sales increased from $118,792 in 1982 to $174,406 in 1983 as a result of higher crop prices, and 9,352 more bushels of soybeans sold. There were also $16,057 more received for sugar beets, but no quantities were given. Quantities of all other crops were less. Total expenses increased $44,377 in 1983. This was mostly from $38,192 more interest expense. Most crop expenses also increased because 38 more acres were farmed. 83 Property taxes rose $10,865, which is indicative of a land purchase, although none was reported. Sales again increased in 1984, but only by $4,003. The increase was attributable to sales of larger quantities, because prices received for crops declined. There was $33,633 less spent on expenses in 1984. Considerable reductions were in custom hire and lease and interest expense. Some machinery was purchased in 1983 and 1984 which may have been leased early, but no specify: information is available. The $30,265 decrease in interest expense may suggest that interest payments were missed, because total liabilities only declined $24,569. Net farm incomes were $-7,519, $-75,8l6, -$55,754 and -$l3,368 for each year analyzed. D-3. Cash grain Case -- Cash Flow statements Net cash income and net cash flow unaccounted for are provided on Table 4-3 on page 84. Net cash income declined from 1981 to 1983 and improved in 1984. The negative values in both 1982 and 1983 indicate serious cash problems. Since net cash income is used for repayment of principal on borrowed funds the question arises as to how principal payments could have been made in 1982 and 1983 if no cash was available. According to the farmer interviewed, no principal was paid in 1982, 1983 or 1984. If this is true, a substantial amount of the cash TABLE 4-3: Cash Farm Receipts Cash Farm Expenses NET CASH INCOME Plus Beginning Cash Balance Non-farm Income Capital Sales New Money Borrowed Decrease in Receivables Total Additions to Cash Non-farm Expenses Capital Purchases Principal Paid Family Living Withdrawals Increase in Receivables Ending Cash Balance Total Subtractions from Cash NET CASH UNACCOUNTED FOR Cash Flow Summary On Cash Grain Farm Case, 1981-84 Telfarmers, For Year Ended December 31, 19XX 1981 1982 1983 1984 $ $ $ 5 196648 118792 174406 178409 178812 166694 228719 174997 17836 -47902 -54313 3412 0 0 0 0 920 28 150 0 73700 0 6500 0 195475 150700 42500 0 0 0 0 0 270095 150728 49150 0 0 0 0 0 79178 47411 13800 9707 261139 76974 166718 28319 25000 24000 24010 20000 0 0 0 0 0 0 0 0 365317 148385 204528 58026 -77386 ~45559 -209691 -54614 85 unaccounted for would be explained. In addition, this farm leases land on a share rent basis. This may explain why land lease does not show up on the income statement from 1982 through 1984 as an expense. When the share rent quantities are used to adjust inventories, additional amounts were available for sale in each year. These adjustments also help to reconcile the cash unaccounted for. Assuming these adjustments are valid and were sold, cash farm receipts would have increased $80,248, $16,502, $3,141 and $27,706 each year, respectively. n-4. W The financial ratiOs presented in Table 4-4 were calculated from the financial statements as presented in this section. As such, they represent a very poor financial position. The three liquidity ratios all show signs of liquidity problems. ‘Current assets were inadequate to pay current liabilities. 'The quick ratio was never more than a fraction greater than zero. Net working capital was negative each year. However, both the current ratio and net working capital improved over the period. The profitability ratios were also very poor from 1981-84. Sales to net working capital was negative each year because of negative working capital. Profit as percent of sales and return on net worth were negative each 86 Financial Ratios On Cash Grain Farm Case, 1981-84 Telfarmers, For Year Ended December 31, 19xx TABLE 4-4: 1981 1982 1983 1984 LIQUIDITY RATIOS Current Ratio 0.64 0.34 0.69 0.84 Quick Ratio 0.06 0.01 0.01 0.01 Net Working Capital -$30083 -$ll4875 -$37639 -$l8599 PROFITABILITY RATIOS Sales to Net Working Capital -6.98 -l.03 -4.63 -9.59 Profit As Percent of Sales -0.04 -0.64 -0.32 -0.07 Return on Net Worth -0.03 -0.84 -0.21 -0.04 Percent Change in Gross Profit -- -0.38 0.49 0.04 Percent Change in Sales -- -0.43 0.47 0.02 Operating Ratio 1.04 1.58 1.29 1.07 Interest to Gross Farm Profit 0.34 0.53 0.56 0.38 ACTIVITY RATIOS Fixed Asset Ratio 0.23 0.15 0.22 0.22 Total Asset Turnover 0.18 0.11 0.16 0.16 LEVERAGE RATIOS Debt Ratio 0.75 0.91 0.76 0.73 Times Interest Earned 0.91 -0.04 0.27 0.79 87 (year because of continuous net losses. Growth of gross profit and sales were very volatile, but positive in 1983 and 1984. The operating ratio shows expenses were greater than gross profit each year. Interest to gross profit shows that interest expense consumed a larger portion of gross profit over the period. Both activity ratios indicate that assets have not been used very efficiently on this farm. In fact, there was a downturn in 1982 because of the decline in both sales and fixed assets that caused this farm to experience greater financial distress in 1982 than any other year of the period analyzed. The leverage ratios indicate the level of debt on this farm may be excessive. While the debt and debt-to-equity ratios show some progress when the first year is compared to the last, the times interest earned ratio worsened. The times interest earned ratio shows that the cash flow on this farm has been inadequate to support the current debt in any year of 1981 through 1984. D-5. W W It appears that 1982 was the worst for this farm. Asset values fell by $113,725. Liabilities increased $89,196. Net worth declined $202,921. Sales fell by $97,794. And net losses reached $75,816. 88 Since 1982 balance sheet and income statement figures have improved, but 1983 and 1984 still saw no profits from this farm and a considerable lack of cash. The cash flow problem has resulted in an inability to repay the debts of this farnn This will likely lead to a complete re- evaluation of the financial structure of the farm in hopes of finding a solution for the owner and the creditors. 0-6. W W From the analysis of the 1981-84 financial statements it was shown that the cash grain farm is in serious financial trouble. The objective in this case is to identify and evaluate alternative operational strategies to improve the profitability of this farm. a. W In order to assess where this farm is likely to be headed 1J1 the near future, a scenario was constructed assuming that the farm will continue to operate as it did over the period of 1981-84. Appendix B gives all the input (Tables 1-8) and results (Tables 9-12) of the Base Run. Table 4-5 also shows the values for input used in the Base Run which change in each alternative. The enterprises (Table 1) include corn, wheat, sugar beets and soybeans. 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">325 5:33 mmoA mwom owofi mam— AmoAAA_AnmAA AmAcr wwmA smog owm~ wwwu "mmAAAAAsmAA Eumuuch_ mwoA AmwA wwmfi mw¢A AmmAAA_A£mAA Acmuuzu wwoA mmofi owofi mwmn Amuomm< _mADH wmoA «wow omwfi mwma AmAmmw< vmwa wmmu ~m®A emo— mwaA Amuomm< Acouuzu Aoozm wo:m~mm vmuoufloug "mac MAmflr 913 NA.A NA.A AA.A AA.A AA.A AA.A AA.A NA.A NA.A NN.A AA.A NA.A AN.A AA.A AA.A AA.A AA.A AA.A AN.A AN.A AA.A AA.A NA.A AA.A AA.A AA.A AA.A AN.A AN.A AA.A AN.A AA.A AA.A AA.A AA.A AA.A AN.A NA.A NA.A NA.A AN.A NA.A AA.A NA.A AA.A AA.A AA.A AA.A AN.A AA.A NA.A AA.A AA.A AA.A AA.A AA.A NN.A AN.A AAA.A NA.A AA.A AN.A AN.A AA.A AA.A AN.N AA.N NA.N NA.N NN.N NN.N NN.N ANAAAA AAAAAAA AAAAA AAANAA AAAAAAAA AANAAAAV AAAANAAA AAAAANAAAAAAAAAAA AANANA AAAAAAA AANAA NAAAAA ANANANAA ANNAAAAA AAAANAAA AAAANAAA AAAAAAAA AAAAAA AAAAAA AAAAAA AAAAAA AAAAAA AAAAAAAA AAAAAAAA AAANANAA AAANANAA AAAAAA AAAAAA ANNAAA AAAAAA NAAAAA NAAAAA AANAAA AANAAA AANAAA AAN.AA NAA.AA NAA.AA NAA.N ANA.AA NAA.AA ANA.AN AAA.AAA NAA.AA AAN.AA AAA.NA NNA.AA NAA.AN NAA.AA AAA.NA NAA.AA AAA.AA NAA.AN NAN.AA AAN.AA AAA.NA NNA.AN NAN.AA NAA.AA NAA.AA NAA.AA AAA.AA ANA.AA NAA.AN AAA.NA NAA.AA NAA.NA AAA.NAA AAA.AA NAA.ANA AAA.AA AAN.AA NAA.AA NAA.AAA NAA.NA NAA.AAA AAA.NAA NAA.AAA ANA.ANA NAA.AAA AAA.AA NAA.AA NAA.AAA NNA.NAA NAA.NAA AAA.AAA ANA.ANA ANA.ANA NNA.AAA AAA.A AAA.AA NNA.AA NAA.AA AAA.AA NAN.AA ANA.N- AAN.AAA NNA.AA- AAN.A AAA.AA AAA.A- ANA.AN AAA.AA- ANA.AAA AAA.AA- AAA.AAN- NAA.AA- AAN.A NAN.A NAA.AA- NAA.AA- AAA.AAA- NAA.AAA- AAN.AA- AAA.NN- NAA.NN- AAA.N AAA.AA AAN.A AAA.AN ANA.AA AAA.A NAA.A AAN.A AAA.A AAA.N ANN.AA AAN.A AAA.AA AAA.A AAA.A NAN.N AAA.A AAN.N AAA.N AAA.N AAA.A AAA.A NAA.A AAA.A NAA.A AAA.A AAA.A A AAAA N .AAA A .AAA A .AAA A .AAA A .AAA N .A;< A .AAA 2AA AAAA wmuzmmmz mocflfiotmm 33:22 so mm>3m=uofi< EA... 595 £25 ”omumm Asa: wwo~ Awafi owoA mwofi AoAAmm Acmuuzo wwoA mm©~ owofi mwofi “Aouwamu wCAxuoz wwma swofi owow ‘ mwofi “9:00: A \wgomtmm 302 mama mwofi omaa mwofi AmEoocA\mmm:waxm Amuob wmou swofi owoa mon A>AA:§A Amczo co cuzuox mwoa swag owmfi mwoA "mummm< AonF co cuaumm mocmEAoAAmm Aonzchm cmuoofloum A0 mwzxoofié 37¢ “...—25. 99 1986. 4A small pretax profit is projected for 1987, but this will become a loss of $3,733 after taxes. It is important to inform the reader here that the decreasing losses in 1986 that change to profit in 1987 result from increases in crop prices as forecasted by the H.S.U. Agricultural Model. (See Table 5 of Appendix B for prices per unit sold.) Therefore, if commodity prices are less than those used in the Base Run net losses will increase. Following Table 9 is the “Cash Flow Reconcilia- tion Statement“ (Table 10). This indicates that the net cash flow will produce larger deficits each year, resulting in increased borrowing to cover the deficit to cash. Table 11, the “Projected Net Worth Statement" shows that total assets are going to continue to decline because depreciation will erode the values of machinery and buildings without new purchases.' Real estate values are assumed to remain constant. Total liabilities are predicted to increase in 1986 because of the principal due on the 1985 operating loan. It should then decline in 1987 and 1988, with the projected decline in long-term liabilities. While this is desired, it can not happen without the erosion of net worth (owner equity). From the values 100 associated with the pro forma owner equity, it can be seen that each year the net losses (after taxes) are reduced by the amount of non-farm income ($275) and the remainder is subtracted from owner equity. It seems likely that insolvency is on the horizon. Looking at Table 12, the 'Projected Financial Performance,“ return on total assets should improve because interest expense and net losses are expected to decline. Return on owner equity is expected to improve, but will remain negative. Total expenses as a percent of gross income will decline, but not below excessive levels. (A total expenses to gross income ratio of 100% means that gross income would be equal to total expenses.) Earnings after taxes to gross income will be negative each year but should improve. Debt servicing (interest and principal payments) to gross income will increase because of increased borrowing for operating loans. Working capital and the current ratio show the degree of illiquidity will increase from 1985-88. The debt to asset ratio (debt ratio) shows a projected increase of debt in relation to total assets that will approach technical insolvency by 1988. 101 c. MW Wan The projected financial statements indicate that the cash grain farm will probably have no measurable signs of improvement unless commodity prices increase, assuming the farm continues “business as usual.‘I It is not advisable to count on prices increasing as forecasted over the next couple of years, because of circumstances (like the weather) that cannot be controlled. If no changes in the finances of this farm are made, bankruptcy may be soon to follow. According to the data, the situation does not appear to be hopeless. d. ' ro 'nanc' 'tu ' n W Given the results of the Base Run simulation, it seems evident that certain financial and/or production adjustments need to be made in order to achieve the goal of increased solvency through improved profitability. The alternatives attempted toward meeting this goal were: 1. Assume crop prices are constant at 1985 levels. 2. Family member gains off-farm employment. 3. Sell second farm of 213 acres. 4. Partial land liquidation with lease back. 102 5. Lease land at current rental rate. 6. Refinance from FmHA at subsidized interest rates. 'L. Lease back land, refinance and increase level of production. 8. Hold crop prices at 1985 levels using the lease back, refinancing and increased production scenario. The changes that occur in each alternative are highlighted in Table 4-5 on pages 89 through 93. Referring to this table will provide the reader with the exact differences between each alternative and the Base Run. Only those input variables that change for the alternatives are listed, showing both as they appear in the Base Run and in a particular alternative. The input variables which do not change are not included in Table 4-5. The results of each alternative by year are provided on Tables 4-6 through 4—8. Table 4-6 contains a condensed version of the projected income statement and cash flow reconciliation. Table 4-7 contains selected values from the balance sheet (net worth statement). And Table 4—8 lists some of the more important measures of financial performance. Each of the three output tables also include figures from the Base Run for easy comparison. The 103 eight alternatives which were tried on the cash grain farm are labelled 'ALT.1' for the first alternative, 'ALT.2' for the second alternative and so forth. Rather than explain each alternative exhaustively, the changes for each are stated, with a brief summary of the outcome. The final alternative selected for recommendation will be presented later, with a comparative analysis of the Base Run. ' ' u e W Holding crop prices constant was experimented with to see how much worse off things would be if crop prices did not increase as in the Base Run. This is not technically an alternative. It is really a means of strategic planning. The only change in this alternative was to reduce the crop prices forecasted for 1986 and 1987 to those forecasted for 1985. Table 4-5 on page 89 shows that crop prices are the same throughout the forecast in this alternative. Table 4-6 shows net cash income would be negative not only in 1985 (like the Base Run) but also in 1986 and 1987. Net earnings after taxes would have larger losses. Cash flow imbalances would be greater, resulting in increased amounts borrowed for operating loans. Balance sheet figures show no changes in any of the assets or long-term liabilities. Current liabilities would 104 increase in 1987 and 1988 (from the additional operating loan amounts). This would create technical insolvency by 1987 and worse so in 1988. Financial performance as measured by return on total assets and return on owner equity would start to decline in 1986 and continue to do so in 1987. Note that return on owner equity would be 166.21% in 1987. Ordinarily, positive returns are desired, however in this instance it results from net losses and negative equity (deficit). Total expenses to income and debt servicing to income would begin tn) increase in 1986, meaning expenses and debt servicing would be taking more of an already insufficient gross income. WOrking capital and the current ratio show an increase in the inability to meet current debt with current assets beginning in 1987. Finally, the debt ratio shows how many times greater total debt would be than total assets in 1987 and 1988. With this scenario, if crOp prices remain at 1985 levels, net losses and cash flow shortages would increase. The result would be insolvency within two years. Altermatiyg 2; Eamily Member gains Qffi-Earm Emplgymgnt The only difference between this alternative and the Base Run is that the amount of annual non-farm income increases from $275 to $10,000 as shown in Table 4-5 under Alternative 2. All income and expense items are unchanged 105 from the Base Run. The amount of unreconciled cash flow and the deficit to operating loans would be improved by $9,725 ($10,000-$275) each year. The values of assets and long-term liabilities would be the same as the Base Run. Current liabilities would decline by $9,725 each year. This would lower total liabilities by the same amount each year. It would also increase owner equity by $9,725 each year. Return on total assets would be unchanged. Return on owner equity would improve (although remaining negative). Total expenses to income would be unaffected. Debt servicing to income would be lower because of smaller operating loans needed. Wbrking capital would improve by $9,725 in 1986 and continue on. (See current ratio for relative change.) The debt ratio would be slightly less in 1986, 1987 and 1988 than the Base Run. Wm The cash grain farm actually consists of two farms. One, the family farm. And two, a 213 acre farm purchased a few years ago. The second farm is currently for sale. An offer was made for $1,250 per acre, but fell through. Cost per acre was $1,500. A partial liquidation of this kind would: 0 decrease cost and market value of land by $319,500 ($1,500 X 213 acres). 106 0 decrease long-term liabilities by $266,250 ($1,250 x 213 acres). 0 decrease acres harvested by 213 acres. 0 eliminate the need for hired labor. <3 decrease variable expenses for machinery and improvements by 213/850, but not for insurance or depreciation on improvements. <> decrease property taxes by 213 acres x $33.80 (average tax per acre). A more detailed account of the input changes are presented in Table 4-5. With lower production resulting from fewer acres farmed, sales, gross income and total expenses would be less each year. Net cash income would also be less. Net earnings after taxes would show a smaller loss in 1985, but larger losses in 1986 and 1987 would occur. Additional money borrowed would be less in 1985, but more in 1986 and 1987. Fixed and total assets would be less in 1985 by the $319,500 decline incurred from the sale, of which $53,250 would be a loss. Current liabilities would be lower in 1985 and 1986 because lower long-term debt would mean less principal due periodically. HOwever, larger operating loans due in 1987 and 1988 would cause current liabilities to be greater in 1988 than the Base Run. The amount of owner equity would be $53,250 less in 1985 because of the loss incurred on sale of land. The erosion of asset values 107 without replacements would be faster than the decline in total liabilities, so debts would be greater than assets by 1987. Return on total assets and return on owner equity would be lower than the Base Run. The reason why the high returns on owner equity in 1986-87 is not an improvement, is that they result from insolvency. Total expenses and debt servicing to income would be greater each year. Working capital would be negative from 1986-88. And 1988 would be worse than the Base Run. The debt ratio would be higher each year, with insolvency occurring in 1987. E]! !' I°EI'JI:"!!' W The same 213 acre farm sold in Alternative 3 is returned to the lender with a lease back agreement in this scenario. It is assumed that asset values will be reduced by cost ($319,500). Long-term liabilities will decrease by the amount received from liquidation. For illustratiwe purposes, $1,250 per acre was used for liquidation. This value is probably too high, but allows the reader to see the direct affect when compared to the Base Run and the sale without lease back. Overhead expenses would change because property taxes would decline by $7,200; interest expense would be less and land lease would increase by $13,845 (213 acres X $65 per 108 acre). Table 4-5 provides the values used for each of these overhead expenses in this alternative. With this alternative sales and gross income are unchanged. Total expenses decline because of lower overhead. Net cash income would show an increase of about $20,000 per year. Net earnings after taxes would also improve and would produce a profit of $8,550 in 1987. Cash flow, although still negative, would lead to much smaller operating loans in 1985-87. Current assets would be the same as the Base Run each year, but fixed assets would be less each year. Because of the lower debt level, current and long-term liabilities would also be less. The decline in total assets and total liabilities would result in lower owner equity each year, because of the loss incurred with liquidation. Even though owner equity would increase in 1988, it would be so small from 1986-88 any unforeseen downturns could lead to insolvency. The return (Ml total assets shows continued improvement. Return on owner equity would decline initially, but improves in 1986 and would have a "genuine" positive return in 1987. Total expenses to income and debt servicing to income would be less each year. Working capital would still only be positive the first year, but shows improvement. Solvency would be jeopardized more with 109 this alternative, as measured by higher debt ratios in 1985-87. An improvement of 1% is projected for 1988. W In this fifth scenario, a lease back of all land is considered. ‘It is assumed that all land assets and debts can be liquidated for values shown on the balance sheet. The deletion of land as an asset is also assumed to eliminate property taxes, although some property taxes would still exist on buildings and residence. This alternative would substantially reduce the amount of interest expense, as shown in Table 4-5. The lease back would increase land lease by $21,775 (335 acres x $65 per acre), annually. Sales and gross profit would be unchanged from the Base Run, but total expenses would be decreased by slightly over $53,000 each year. Because these declines occur in cash expenses, net cash income increases by the full amount. This translates into profits in both 1986 and 1987. A cash surplus would occur in 1987 and only small operating loans in 1985 and 1986 would be necessary. Current assets would increase in 1988, with increased cash. Fixed assets would be less than the Base Run each year because only machinery and buildings would remain. Current and long-term liabilities would also be less each year without any land debt to repay. While the result 110 would be a considerable decline in owner equity in 1985, 1986 would decline much less and 1987 and 1988 would show growth in net worth. Returns on total assets and owner equity would increase by large amounts. Total expenses to income and debt servicing totincome would decline. Working capital would become positive throughout the period. The debt ratio would be lower each year when compared to the Base Run and would decrease at an increasing rate. 51W sul'l'lll !E! The FmHA (Farmers Home Administration) allows farmers meeting certain criteria to obtain loans at below market interest rates. The subsidized interest rate on operating loans is currently 7-1/4% and 5-1/4% on real estate loans. The maximum amount that can be borrowed for either purpose is $200,000. Therefore, it is possible to borrow up to $400,000 ($200,000 for operating and $200,000 for real estate) at these lower interest rates. It is also possible to borrow up to $400,000 for operating loans and $300,000 for real estate with a guaranteed loan, but the interest rates are not subsidized. The amortization period (years to repay) of each loan type can also be increased from five to seven years on operating loans and from 30 to 40 years on real estate. This is important, because lengthening the time to repay, will increase the total amount of interest 111 paid on a loan, but will lower the periodic payments. This helps improve cash flow. The amount of debt the cash grain farm has is greater than the lindts required for each loan type to refinance all debt at the subsidized interest rates. Therefore, this refinancing scenario was designed to restructure the existing loans to take advantage of the subsidized cost of money. This means only part of the total debt can be refinanced. The changes in the liability structure would be as follows: 0 decrease bank loan by $200,000. 0 create an FmHA operating loan for $200,000 at 7-1/4% for 7 years. 0 pay off the $157,065 FLB loan. 0 pay off $42,935 of the land contract. 0 create an FmHA real estate loan for $200,000 ($157,065 + $42,935) at 5-1/4% for 30 years. The outstanding loan balance is listed for each loan by year under Alternative 6 in Table 4-5 on page 89. Also listed is the amount of interest expense required each year in this alternative. The amount of interest paid would be $23,712 less in 1985; $21,652 less in 1986 and $19,257 less in 1987. Sales and gross income would be identical to the Base Run. Total expenses would decline with lower interest expense. Net cash income would be improved for the same 112 reason expenses would decline. Net earnings after taxes would show a profit of $8,336 in 1987. Unreconciled cash flow would be -$34,995 in 1985: -$42,629 in 1986 and -$39,532 in 1987. Here is where the extra two years added to the operating loan become important. All else the same, if the term were to be five years (as in Base Run) the unreconciled cash flows would be -$46,665, -$66,258 and -$75,602 for 1985-87. It may not seem crucial in this alternative, but in the final alternative these extra two years make the difference between positive and negative cash flow. Assets would be the same as the Base Run. Current liabilities would be less because the lower interest rates and extended term on the operating loan would lower the periodic payment each year. Therefore, not only would the portion of interest decrease, so would the principal portion. If the term on the operating loan was five, rather than seven years, current liabilities would be greater than the Base Run. This would occur because the faster repayment schedule means the total principal ($200,000) would be paid back at a faster rate. In contrast, the long-term liabilities would be greater than the Base Run because the smaller principal payments lead to more debt outstanding at the end of each year. 113 Owner equity would not be affected in 1985. It would decline in 1986 and 1987, but not as much as the Base Run. In 1988, owner equity would grow $8,611. Return on total assets would be less in 1986 and 1987. Return on owner equity would improve, showing a positive return of 11.07% in 1987. Total expenses and debt servicing to income, would be less than the Base Run each year, indicating improved repayment capacity. Werking capital would show adequate improvements, with current assets satisfying current liabilities throughout the period. The debt ratio would be the same as the Base Run in 1985, but would be lower from 1986-88. However, the debt ratio would still increase by 2% over the period, putting more pressure on solvency. ' ° ck d ' c and Increase Lgygl 9f Eggductigm A combination of returning the land to the lender and leasing it back, with refinancing $200,000 (maximum) of Bank notes at 7-1/4% for 7 years from the FmHA was first considered in this alternative. Net earnings after taxes became -$l,997, $17,080 and $26,559 in 1985, 1986 and 1987 respectively. Cash flow became $3,885, $23,917 and $51,344 each year. Solvency as measured by the debt ratio was 0.79, 0.78, 0.69 and 0.57 from 1985-88. To improve on the net loss projected for 1985 an attempt at decreasing crop acreage and crop expenses by 25% was tried. This 114 resulted in a greater loss in 1985 and lowered profits in 1986 and 1987. The same scenario was run with crOp acreage and crop expenses increasing 25%. The results of which are provided on Tables 4-6 through 4-8, under 'ALT.7.' There are many changes in the Base Run input which were necessary to simulate the projected outcome of this alternative. Table 4-5 illustrates what returning the land and refinancing $200,000 of the bank debt would do to the asset/liability structure. Acres of each crop harvested are shown in Table 4-5 with an increase of 25% (rounded to the nearest whole acre). This increased total crop acres harvested from 850 in the Base Run to 1,061 in this scenario. No land is owned, so all would have to be leased. It is assumed that 1,061 acres are rented on a cash basis for $65 per acre and that land would be available. The increased level of production would allow 25% more quantities of each crop to be sold, keeping inventories the same as in the Base Run. This increased level of pro- duction would also require 25% more hours of labor for each crop. This added labor is hired for $5.00 per hour in this alternative. The remaining changes for Adternative 7 pertain to income and expense items. Other farm income increased (25%) from $13,693 to $17,116. All machinery and 115 improvement expenses, except for insurance and depreciation on improvements increased 25% over the Base Run. Property taxes were assumed to be zero. Interest expense was calculated to be $16,053 in 1985: $14,124 in 1986 and $12,041 in 1987. Land lease increased from $33,485 per year in the Base Run to $68,965 per year. Increased production would cause sales and gross income to increase $54,914 in 1985; $63,812 in 1986 and $68,452 in 1987, holding inventory levels the same as the Base Run. Total expenses would decrease although operating expenses and land lease would be greater because of no pro- perty taxes and the decrease in interest expense. The amount of interest savings each year would be $73,815, $71,363 and $68,543 for two reasons. One, no land debt eliminates all interest expense on real estate, saving $64,314, $63,978 and $63,607 in 1985, 1986 and 1987, respectively. Secondly, the lower interest rate on the $200,000 FmHA operating loan would decrease interest expense by $9,500, $7,385 and $4,937 throughout 1985-87. The net effect of increased production level would increase net cash income more than $76,000 per year. Thus converting the -$29,616 of the Base Run in 1985 to $46,937. Net earnings after taxes would show profits each year, rather than consecutive losses as illustrated in Table 116 4-6. Unreconciled cash flow would be positive from 1985-87 and would grow with increased cash from operations. Current assets would increase from 1986-88 due to the increased beginning cash balances. Fixed assets would decline by $651,908 in 1985 from the land liquidation and continue in) decline by $34,874 throughout the period because without purchasing new equipment no offsets are weighed against the depreciation used in the template. Therefore, total assets would become $267,710, $246,193, $243,993 and $251,295 at the beginning of each year projected. Current liabilities would decline drastically because the major contributor to long-term debt (land) would be eliminated, causing principal due on existing loans to fall. In addition, no need for operating loans with this alternative and refinancing would lessen current liabilities even further. Although owner equity wouLd be cut by more than half in 1985, it is projected to increase each of the remaining years. Note that 1986-88 would have larger net worth than the Base Run. In particular, net worth in 1988 would be $119,796 versus $26,731 with the Base Run and increases annually. As might be expected, financial performance would be the best with this alternative. Return on total assets 117 would be more than double that of the Base Run. Return on owner equity would be 5.78%, 34.55% and 35.55% from 1985- 87, compared to negative returns in the Base Run. Tbtal expenses to income would be less than 100% each year, meaning total expenses are less than gross income. In addition, they will decline, making them more manageable. Debt servicing to income would also be considerably less each year without the land debt and with the refinancing. It would also show annual declines, rather than continuous increases. Changes in current assets and liabilities would result in positive and growing working capital, not negative and shrinking like the Base Run. Finally, the debt ratio would be 79% in 1985 versus 88% in the Base Run. It would decline 3% in 1986, 10% in 1987 and 14% in 1988. This is in contrast to the annual increases with the Base Run. By 1988, the projected debt ratio would be only 52%. ll !' E° I12: 2' In“ ls MW Increased Ergdgctig Scenarig Because the future for this farm is decided to a large extent by what crop prices are going to be, the previous alternative, (Alternative 7) which produced the most favorable results, was subjected to a "what if" situation where crop prices did not increase at all. The only difference between this alternative and the lease back, 118 refinancing and increased production alternative is that crop prices are held constant throughout the forecast period at the prices used for 1985. Table 4-5 under Alternative 8 lists the changes for this alternative. The only difference in input between this and Alternative 7 is the crop prices received. Table 4-5 shows that crop prices were not projected to increase in Alternative 8 as they did in the Base Run. As was pointed out in Alternative 1, where prices were held at 1985 levels in comparison to the Base Run, profitability and solvency would be worsened. Therefore, it seems reasonable, after finding an alternative to recommend for the cash grain farm, to determine the outcome with less optimistic crop price forecasts. The outcomes of this alternative would obviously be the same as Alternative 7 in 1985. The changes that would occur in the following years would be due only to lower crop prices. Sales and gross income would be greater than the Base Run but only by $421 in 1987. Keep in mind, this is with 25% more production than the Base Euun. Total expenses would be the same as in Alternative 7, but this is less than the Base Run in any year. The amount of net cash income would be relatively the same each year, varying only $1,769 over the three year 119 period. Net cash income would not increase as it did when crop prices rose, but it would still be much better than the Base Run. Net earnings after taxes would be only $3,283 in 1985; $2,249 in 1986 and $3,416 in 1987: indicating the 1985 crop prices are very close to break-even prices for this farm, in this scenario. The unreconciled cash flow would be $14,357 in 1985 and increase about $10,000 per year. Therefore, even without crop price increases, leasing back all land, refinancing and increasing production levels 25% would pro- duce positive cash flows. However, if the refinancing part of this scenario does not include a seven year term on the operating loan, then cash flow would be negative in 1987. Just by changing the term to five years would cause the cash flow of this alternative to be only $2,686 in 1985, $1,123 in 1986 and -$1,666 in 1987. As such, assuming crop prices will not increase in 1986 and 1987, the importance of refinancing over seven years can not be overemphasized if the objective is to be met in this alternative. Current assets would increase with the annual cash surpluses. Fixed assets would be identical to Alternative 7, both of which are less than the Base Run. As mentioned earlier, this would occur because of the land liquidation. On the other side of the balance sheet, all liabilities would be the same as Alternative 7, so they 120 would be less than the Base Run. Owner equity would react the same as it did in Alternative 7 in 1985 and 1986. It would be larger than the Base Run values in 1987 and 1988, but would be less than Alternative 7 because of lower beginning cash balances in those years. The only measure of financial performance that would not be better than the Base Run would be the return on total assets in 1986 and 1987. The reason being, net earnings after taxes and interest expense would change very little. Return (n1 owner equity would be similar to what the owner could earn on a savings account at a local bank, but that would be better than the Base Run projections. All but about 4% of gross income would be consumed by expenses each year if crop prices don't increase. Debt servicing to income would remain constant at 14.70% per year. Working capital, while not as great as when crop prices increased, would be at comfortable levels and growing. The debt ratio would decline continuously (but not as fast as Alternative 7). It would be 15% greater in 1988 than Alternative 7, but would still be 30% less than the Base Run. n-7. W The objective of doing the computer simulation was to determine what is necessary to improve net farm income and 121 cash flow in order to increase the level of solvency of the cash grain farm. While most of the alternatives were a step towani meeting the objective, one was not. This alternative involved the partial liquidation of the farm by selling 213 acres (Alternative 3). This was the only alternative, except for doing nothing and crop prices not increasing (Alternative 1) that lead to technical insolvency. No alternative by itself was sufficient at meeting the objective. A combination of leasing the land back and refinancing the maximum amount possible on other loans would possibly be acceptable, but to achieve the objective, a 25% increase in production levels would also be necessary. This is especially true if crop prices do not increase over the three year period. The recommendation is to: l. Liquidate land and lease back at $65 per acre the 335 acres currently being purchased. 2. Refinance $200,000 of bank debt from FmHA at 7-1/4% for 7 years. 3. Increase level of production 25% with increased acreage. E. Analysis of Case Study flog Farm This hog farm has a farrow-to-finish operation with between 150 and 175 sows, selling from 1,000 to 1,400 hogs per year. The farm includes 235 acres, of which 146 are 122 tillable. The farm also rents 275 acres. In the past it has grown corn, for feed and has used 35 acres for pasture. Before discussing the hog farm case, two things should be pointed out. First, this farm switched from Telfarm in 1984 to a record keeping service provided by the Production Credit Association (P.C.A.) called Agrifacts. Because of this, the only records available from 1984 are those prepared for tax purposes. Secondly, this farm violates the criteria of having a debt ratio of 70% or greater in 1983 because $147,000 of real estate purchased in 1983 was not recorded as an asset. It did however show up as a liability. When the correction is made, the debt ratio for 1983 is reduced from 83% to 62%. The absence of a 1984 ending balance sheet meant that one had to be created in order to provide the necessary simulation input. The monthly cash flow statements were available for 1984. They provide information needed to construct the liability structure of the 1984 balance sheet. Because no data was prepared regarding assets, the values associated with each asset on the 1984 ending balance sheet are either three year averages or estimates based on past trends. 123 B-l. B99_2Alfl.§fl§£::flilfln2£_fih£§§fi 8- m The value of total assets increased over the period of 1981-83 from $410,681 to $586,370. Table 4-9 on page 124 shows the actual balance sheets from 1981-82. The 1983 balance sheet has been adjusted for the $147,000 increase in real estate. Nineteen hundred and eighty-four‘s balance sheet is an estimate. During 1982, total assets rose $47,694. This increase occurred from better market prices for livestock and an appreciation in the estimated value of real estate. Although the balance sheet does not show it, the number of each type of livestock declined. Just the opposite was true of livestock values in 1983. The values of market hogs and sows each declined because prices fell. The number of market hogs actually increased, while the number of sows fell from 175 to 160. Value of boars rose because of keeping more on inventory. The purchase of a farm was made in 1983. The details of the purchase are not known, but it is assumed to have increased the value of fixed assets by 124 TABLE 4-9: Balance Sheets On Hog Farm Case, Telfarmers, For Year Ended December 31, 19xx ASSETS 1981 ...... ...-.- Current Assets 5 ...-I-Ii-IIIII Cash 0 Crops 1000 Feed 43500 Supplies 0 Market Hogs 27880 Total Current Assets 72380 Intermediate Assets 8.-.--.--.--------- Accounts Receivable 0 Sows 22300 Boars 2400 Machinery 5 Equipment (Market Value) 93601 Non-farm Business Assets 0 Household Assets 0 Total Intermediate Assets 118301 Fixed Assets ......IIIBI- Estimated Value of Real Estate 220000 TOTAL ASSETS 410681 LIABILITIES & NET WORTH .8888288-3-883383888223 Current Liabilities Accounts Payable 0 Production Credit Association 3600 Banks 1125 Farmers Home Administration 11902 Total Current Liabilities 16627 Intermediate Liabilities Merchants & Dealers 0 Production Credit Association 14400 Banks 4125 Farmers Home Administration 37688 Other Credit Institutions 19660 Total Intermediate Liabilities 75873 Long—term Liabilities Banks 2250 Farmers Home Administration A 590 Insurance Companies 3 Individuals 7233 Federal Land Banks 112814 Total Long-term Liabilities 172023 TOTAL LIABILITIES 264523 Net Worth 146158 TOTAL LIABILITIES & NET NORTH 410681 1981-84 1982 S 1000 240 45785 126950 250000 458375 1983 $ 1000 520 46600 116000 397000 586370 382238 I-) (H (j) (C) (3 C.) -| C) t') ( _) (II 1984 $ 1000 587 48231 127500 397000 603495 - .- v «V --—--- 125 $147,000 because long-term liabilities increased by that amount in 1983. The 1984 values of each asset were determined as follows: 0 cash........................... estimate 0 crops.......................... 3-year average 0 feed........................... 3‘year average»of growth 0 supplies....................... 3-year average 0 market hogs.................... 3-year average 0 accounts receivable............ estimate 0 sows........................... estimate 0 boars.......................... estimate 0 machinery and equipment........ 3-year average 0 nonAbusiness assets............ 3-year average 0 household asset................ 3-year average 0 real estate.................... estimate b. I' !'J't' Total liabilities increased $101,923 between 1981 and 1984. Current and intermediate liabilities declined over the period, but the land purchase in 1983 of $147,000 caused total liabilities to increase as it did. There does not appear to be any changes that attract attention other than the land purchase. 126 c. W The $107,056 increase in owner equity during 1982 was partially due to the increase in total assets ($47,694) and from the decline in total liabilities ($59,362). The decline of about $30,000 in 1983 occurred from falling market prices for livestock and from more money borrowed for operating purposes. In 1984, net worth should have been $237,049, based on the estimated assets. B-2. a2s_Earm_£ass::1n22mg_5tatemsat§ Net income, as shown on Table 4-10 was quite volatile from 1981-83. With a reported net earnings before taxes of $45,630 in 1982, it appears that the increase in hog prices during 1982 had a significant impact on this farm's financial well-being. In 1982, sales increased $53,944 because more hogs were sold at higher prices. Gross profit also increased with improved sales. Tbtal expenses were also greater in 1982. From the increases in expense items, it looks as though most of the increase was necessary to support a larger hog operation. As hog prices fell in 1983, so did sales dollars. This resulted in a lower gross profit that year. Total expenses were lower in 1983 as a result of less money spent on crops and livestock. Interest expense was also less, 127 TABLE 4-10: Income Statements On Bog Farm Case, 1981-83 Telfarmers, For Year Ended December 31, 19xx INCOME 1981 1982 1983 III... ...-... ...-... ......- $ $ $ Sales 181737 235681 183676 Purchases 3440 3600 3250 Beginning Inventory 138874 97080 117375 Ending Inventory 97080 117375 94370 Gross Profit 136503 252376 157421 EXPENSES Hired Labor 2890 1583 1597 Repairs, Maintenance, Tools 7261 9342 9518 Fuel, Oil & Grease 10469 8551 6312 Custom Hire a Lease 1460 555 739 Conservation 140 0 280 Insurance 1307 1207 1201 Building a Land Lease 11401 15364 12455 Fertilizer & Lime 13041' 12572 13558 Crop Supplies & Packages 456 290 0 Seed, Plants 5 Trees 4513 8382 2610 Chemicals 5684 6593 6292 Crop Marketing 307 111 59 Other Crop Expense 2388 4076 2082 Feed, Supplements & Additives 45493 58396 55554 Semen & Breeding Fees 0 0 0 Veterinarian,Medicine, & Drugs 2431 4499 3681 Livestock Marketing, Etc. 364 260 301 Livestock Supplies 5 Other 188 1279 573 Property Taxes 2418 7855 141 Utilities 1576 1441 1116 Interest 31215 39991 31454 Depreciation 19596 19830 19413 Miscellaneous 1064 4569 1513 Total Expenses 165662 206746 170449 Less: Increase in Prepaid Expenses 0 0 0 Adjusted Total Expenses 165662 206746 170449 NET FARM INCOME BEFORE TAXES -29159 45630 -13028 128 this may indicate that some interest payments were missed because the $147,000 land purchase shows no principal paid during 1983. If this is true, losses would have been more in 1983. 2-3. W The sources and uses of cash are presented in Table 4-11 on page 129 for 1981-84. All figures are actual, except family living withdrawals, which was estimated. Notice that the $147,000 does not show up as money borrowed in 1983. It may be that the buyer and seller negotiated a small down payment, since this purchase is being made from an individual. That may explain why only $26,000 was borrowed in 1983. E-4. s -- ' ' at'o Although there is a lack of cash, the farm has ample liquidity as measured by growing current ratios and working capital. (See Table 4-12, page 130.) Profitability has not been so good. Nineteen hundred and eighty-two showed great improvement, but 1983 saw the profitability ratios plummet as fast as they rose the year before. It would be advisable to develop a marketing plan designed to smooth out the radical changes in sales, gross profit and ultimately, net earnings. This might be accomplished with forward contracting, futures markets or options. 129 TABLE 4-11: Cash Flow Summary On Bog Farm Case, 1981-84 Telfarmers, For Year Ended December 31, 19xx 1981 1982 1983 1984 $ 3 S 3 Cash Farm Receipts 181708 235681 183676 226464 Cash Farm Expenses 149506 187348 154287 193881 NET CASE INCOME 32202 48333 29389 32583 Plus Beginning Cash Balance 0 0 0 0 Non-farm Income 0 352 528 176 Capital Sales 11071 0 0 0 New Money Borrowed 191512 6863 26004 69805 Decrease in Receivables 0 0 0 0 Total Additions to Cash 202583 7215 26532 69981 Minus Non-farm Expenses 0 0 0 0 Capital Purchases 44565 8161 8375 2129 Principal Paid 166947 66225 39081 66223 Family Living Withdrawals 23273 18000 8465 34212 Increase in Receivables 0 0 0 0 Ending Cash Balance 0 0 0 0 Total Subtractions from Cash 234785 92386 55921 102564 NET CASE UNACCOUNTED FOR 0 -36838 0 0 130 Financial Ratios On Hog Farm Case, 1981-83 Telfarmers, For Year Ended December 31, 19xx TABLE 4-12: 1981 1982 1983 LIQUIDITY RATIOS Current Ratio 4.35 7.86 5.67 Quick Ratio 0.00 0.10 0.08 Net Working Capital $55753 $71060 $60438 PROFITABILITY RATIOS Sales to Net Working Capital 3.26 3.32 2.61 Profit As Percent of Sales -0.16 0.19 -0.07 Return on Net Worth -0.20 0.18 -0.17 Percent Change in Gross Profit -- 0.85 -0.38 Percent Change in Sales -- 0.30 -0.22 Operating Ratio 1.21 0.82 1.08 Interest to Gross Farm Profit 0.23 0.16 0.20 ACTIVITY RATIOS Fixed Asset Ratio 0.83 0.94 0.46 Total Asset Turnover 0.44 0.51 0.31 LEVERAGE RATIOS Debt Ratio 0.64 0.45 0.62 Debt-to-Equity 1.81 0.81 1.62 Times Interest Earned 1.29 1.77 1.70 131 Activity ratios show that since the land purchase, assets have not yet been employed nearly as efficiently as in the past. The debt and debt-to-equity ratios show that a slight decline in leverage took place from 1981 to 1983. These indicate that expansion has been beneficial for this farm. The times interest earned ratio increased, suggesting an improvement in the ability to repay current debts. 3-5. W Overall, this farm is not in very bad shape. Developing a marketing plan would probably increase sales dollars (depending on prices). With assets and net worth growing, solvency is not as critical of an issue as generating profits and good cash flows are. If profitability can be restored and volatility smoothed, this farm should maintain continuity. E-6. W The Base Run simulation on this farm assumes the hogs' feed will consist of corn only. The inventories of oats and hay are sold in 1985 to help increase the cash flow. a. W The input for this farm is provided in Tables 1 through 8 starting at the beginning of Appendix C. 132 Table 4-13 also shows the values for input used in the Base Run which change in each alternative. Table 1 shows breeding livestock and crops which were on the 1984 balance sheet. Table 2 provides the details on assets and liabilities. Table 4 shows the simulated hog operation will include 162 sows producing 27.00 cwt.per head. Prices for output are average dollars received per hundred-weight for 1985. The 1986 and 1987 prices are forecasted hog prices of the MSU Agricultural Model. Other income per head and capital gain income per head are based on the estimates in the Estimated Crop and Livestock Budgets for Michigan, 1984 for a 2 litter farrow-to-finish operation.18 For example, the 1984 hog price given in the Estimated Crop and Livestock Budgets for Michigan was $50.00 per cwt. Sow price per cwt. was $42.00 and boar price was $37.00 per cwt. Using the average 1985 hog price of $46.70, prices of market hogs declined 6.6% from 1984.19 Assuming the same reduction in sow and boar prices, they would be $39.22 and $34.56, respectively in 1985. With an estimated 1.60 cwt. of sows sold and 0.18 cwt. of boars sold per head (from budget), the other income per head in 1985 would be: $39.22 * 1.60 cwt. + $34.56 * 0.18 = $68.97. 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mmeNm .o mwpo< o o o ooN ooN ooN .nmumm>pms choc mmuo< m mNnme o» o» ow mNmm» quoNa oomNNN .munmn “wage o» o» ow «NNooa onooa quNow .unmw ucmN Nmsz>chH o“ o» o» ooNomm» mNNoomw moqqom» .unmw ucmN «mes NmN.m NmN.m NmN.m .<.z .<.z .<.z .unmn 3m: so mum“ .ucH oNonN» oNNqu» oooooN» .<.z .<.z .<.z .unmn .QEN a .wnNn =3mz: NqowNN» NoNNNNN qmfiqNN» onNom» ommNNm» ommowma .unmv .QEN a .man :cNoz o» ON ON oquN» «ommN» NNNNNN .unmc xamm o» o» o» o» 0% mewmm» .mNnmNma mucsoou< o» o» o» aaNoNNa ooNoNNw ooNoNNN .Amst> umxumsv wan; oonoa ooncw oono» oooooN» oooooNa oooooNa .szNm> umxumsv Npchzomz «mooofia onoaa «NNNNN NNoNNN» mmNNQNN NNoqNNe . chsumE .omuamc .esou< moNNNN» moNNNN» moNNNN» mmqum» mmqum» mmqum» .umou Nuchgumz N «Name w NmoN omoN mNoN NNNN omoN mme =ONumooN «Name mocmpmuom “mnasz m>fiumcumua< you mwcmnu pom m2~m> cam mmmm a xwvcmam< m>wumcumua< AvmscNucouv "mN-q mqm cam mmmm a xwvcmaa< m>wumcumua< Aumchucoov “mN-q m4m>>>>>>>>>>>> 1985 1986 FEEDER LIVESTOCK ENTERPRISE )>>)> NUMBER OF HEAD: PUCHASED SOLD ENDING INVENTORY PRICE PER HEAD: PURCHASED SOLD ENDING INVENTORY LIVESTOCK EXPENSES PER HEAD OUTPUT VALUES: BEGINNING INVENTORY $0 $0 PURCHASED $0 $0 SALES $0 $0 ENDING INVENTORY $0 $0 CHANGE IN INVENTORY $0 $0 LIVESTOCK EXPENSES $0 $0 1987 FEEDER LIVESTOCK ENTERPRISE >>>>> NUMBER OF HEAD: PUCHASBD SOLD ENDING INVENTORY PRICE PER HEAD: PURCHASED SOLD ENDING INVENTORY LIVESTOCK EXPENSES PER HEAD OUTPUT VALUES: BEGINNING INVENTORY $0 $0 PURCHASED $0 $0 SALES $0 $0 ENDING INVENTORY $0 $0 CHANGE IN INVENTORY $0 $0 LIVESTOCK EXPENSES $0 $0 TABLE 4. ANNUAL PLANNING DATA FOR BREEDING LIVESTOCK PLANNING YEAR )>>>>>>>>)>>> 1985 1986 BREEDING LIVESTOCK ENTERPRISE >>>>> NUMBER OF BREEDING ANIMALS: PRODUCING OUTPUT ON ENDING INVENTORY PRIMARY OUTPUT: QUANTITY PER HEAD PRICE PER UNIT OTHER INCOME PER HEAD CAPITAL GAIN INCOME PER HEAD LIVESTOCK EXPENSES PER HEAD OUTPUT VALUES: BEGINNING INVENTORY $0 $0 SALES PRIMARY OUTPUT $0 $0 SALES OTHER OUTPUT $0 $0 ENDING INVENTORY $0 $0 CHANGE IN INVENTORY $0 $0 LIVESTOCK EXPENSES $0 $0 BREEDING LIVESTOCK ENTERPRISE >>>>> NUMBER OF BREEDING ANIMALS: PRODUCING OUTPUT ON ENDING INVENTORY PRIMARY OUTPUT: QUANTITY PER HEAD PRICE PER UNIT OTHER INCOME PER HEAD CAPITAL GAIN INCOME PER HEAD LIVESTOCK EXPENSES PER HEAD OUTPUT VALUES: BEGINNING INVENTORY $0 $0 SALES PRIMARY OUTPUT $0 $0 SALES OTHER OUTPUT $0 $0 ENDING INVENTORY $0 $0 CHANGE IN INVENTORY $0 $0 LIVESTOCK EXPENSES $0 $0 249 TABLE 5. ANNUAL PLANNING DATA FOR CROPS PLANNING YEAR >>>>>>>>>>>>> 1985 1986 1987 CROP ACRES HARVESTED CORN 300 300 300 WHEAT 135 135 135 SUGAR BEETS 50 50 50 SOYBEANS 365 365 365 TOTAL CROP ACRES 050 050 850 CROP ACRES OWNED 335 335 335 CROP ACRES TO LEASE 515 515 515 CROP YIELD PER ACRE CORN 100.0 100.0 100.0 WHEAT 70.0 70.0 70.0 SUGAR BEETS 21.0 21.0 21.0 SOYBEANS 37.0 37.0 37.0 tittiiiiit LIVESTOCK NUMBERS ttfittttttit A. FEEDER LIVESTOCK 1. 0 0 0 2. 0 0 0 B. BREEDING LIVESTOCK 1. 0 0 0 2. 0 0 0 C. CROPS CROP PRODUCTION *********‘* 1. CORN 30000 30000 30000 2. WHEAT 9450 9450 9450 3. SUGAR BEETS 1050 1050 1050 4. 0 0 0 5. SOYBEANS 13505 13505 13505 6. 0 0 0 7. 0 O 0 8. 0 0 0 CROP QUANTITY TO FEED CORN WHEAT SUGAR BEETS SOYBEANS CROP QUANTITY TO SELL CORN 30000 30000 30000 WHEAT 9450 9450 9450 SUGAR BEETS 1050 1050 1050 SOYBEANS 13505 13505 13505 251) CROP QUANTITY TO PURCBASE CORN wBEAT SUGAR BEETS SOYBEANS CROP QUANTITY ON ENDING INVENTORY CORN o 0 o WHEAT 0 0 o SUGAR BEETS 680 680 680 0 o 0 SOYBEANS 13000 13000 13000 0 0 o 0 0 0 0 0 0 CROP PRICE PER UNIT SOLD CORN $2.47 $2.81 $2.92 WHEAT $3.15 $3.51 $3.65 SUGAR BEETS $29.00 $30.00 $31.00 SOYBEANS $5.69 $7.25 $8.22 CROP ' PRICE PER UNIT PURCHASED CORN WHEAT SUGAR BEETS SOYBEANS CROP CROP ExPENSEs PER ACRE CORN $79 $79 $79 WHEAT $48 $48 $48 SUGAR BEETS $155 $155 $155 SOYBEANS $66 $66 $66 OUTPUT VALUES: BEGINNING INVENTORY PURCHASES SALES ENDING INVENTORY CHANGE IN INVENTORY CROP EXPENSES $82,590 $0 3211.161 $82,590 $0 $62,020. $82,590 $0 $246,881 $82,590 $0 $62,020 $82,590 $0 $265,654 $82,590 $0 $62,020 251 TABLE 6. ANNUAL LABOR REQUIREMENTS ENTERPRISE LABOR/ENT. 1985 1986 1987 0 0 0 0 0 0 0 O 0 0 0 0 CORN 5.6 1680 1680 1680 WHEAT 2.3 311 311 311 SUGAR BEETS 12.0 600 600 600 0 0 0 SOYBHANS 3.1 1132 1132 1132 0 0 0 0 0 0 0 0 0 TOTAL LABOR HOURS NEEDED 3722 3722 3722 TOTAL LABOR HOURS AVAILABLE 3623 3623 3623 TABLE 7. ANNUAL CAPITAL PURCHASES AND LOAN DATA 1985 1986 1987 3-YEAR PROPERTY: -- --- --- AMOUNT PURCHASED YEARS TO REPAY LOAN INTEREST RATE ON LOAN S-YEAR PROPERTY: AMOUNT PURCHASED YEARS TO REPAY LOAN INTEREST RATE ON LOAN 18-YEAR PROPERTY: AMOUNT PURCHASED YEARS TO REPAY LOAN INTEREST RATE ON LOAN LAND NON-DEPRECIABLE: AMOUNT PURCHASED YEARS TO REPAY LOAN INTEREST RATE ON LOAN TABLE 8. ANNUAL INCOME/EXPENSE ITEMS ***** INCOME ***** 1985 1986 1987 OTHER FARM INCOME $13,693 $13,693 $13,693 NON-FARM INCOME $275 $275 $275 tiiit EXPENSES it... LABOR: HIRED LABOR $495 $495 $495 FAMILY LABOR DRAW $18,115 $18,115 $18,115 TOTAL LABOR $18,610 $18,610 $18,610 MACHINERY 8 IMPROVEMENTS: REPAIRS, MAINTENANCE $13,704 $16,500 $16,750 CUSTOM HIRE & LEASE $7,500 $7,500 $7,500 STORAGE, WAREHOUSING PAST INSURANCE YEAR $923 $923 $923 FUEL, OIL & GREASE ---- $12,170 $12,170 $12,170 DEPR. MACHINERY $20,767 $20,767 $20,767 $20,767 DEPR. IMPROVEMENTS $8,914 $8,914 $8,914 58,914 TOTAL MACH. & IMP. $63,978 $66,774 $67,024 OVERHEAD: PROPERTY TAXES $11,322 $11,322 $11,322 UTILITIES $3,057 $3,057 $3,057 INTEREST $89,868 $85,487 $80,584 LAND LEASE $33,475 $33,475 $33,475 MISCELLANEOUS $1,821 $1,821 $1,821 TOTAL OVERHEAD $139,543 $135,162 $130,259 NUMBER 0? TAXABLE PARTNERS 252 1985 1 1986 1987 222.. —. -.-----.--3‘=-.-.-.-.--.--822 DESCRIPTION OF PLAN: NAME: CASE GRAIN FARM CASE BASE RUN ADDRESS: CITY: STATE: ZIP CODE: TABLE 9. PROJECTED INCOME STATEMENT PLANNING YEAR >>>>>>>>>> 1985 1986 1987 .fi... INcoug **.** SALES: CASH CROPS $211,161 $246,881 $265,654 PEEDER LIVESTOCK so so so LIVESTOCK PRODUCTS so so so OTHER FARM INCOME $13,693 $13,693 $13,693 TOTAL SALES $224,854 $260,574 $279,347 COST OP EEEDERS/CROPS PURCE. so so so CHANGE IN INVENTORY so so so GROSS INCOME $224,854 $260,574 $279,347 *titt EXPENSES itiit LABOR $18,610 $18,610 $18,610 MACHINERY a IMPROVEMENTS $63,978 $66,774 $67,024 CROP $62,020 $62,020 $62,020 LIVESTOCK so so so OVERHEAD $139,543 $135,162 $130,259 TOTAL ExPENSEs $284,151 $282,566 $277,913 ***** NET ***** NET CASH INCOME ($29,616) $7,689 $31,115 NET EARNINGS ($59,297) ($21,992) $1,434 SELF-EMPLOYMENT TAxES so so $2,737 INCONE TAXES so so $2,430 NET EARNINGS APTER TAXES ($59,297) ($21,992) ($3,733) ***** NON—PARI‘ ***** NON-FARM INCOME $275 $275 $275 TABLE 10. CASE FLOW RECONCILIATION STATEMENT BEGINNING CASH BALANCE $1,000 so so NET CASH FROM OPERATIONS ($29,616) $7,689 $25,948 NET CASH FROM NON-EARN $275 $275 $275 MONEY BORROWED so so so PRINCIPAL PAYMENTS $36,826 $106,374 $144,521 CAPITAL PURCHASES so so so NET CASH PLON ($65,167) ($98,411) ($118,298) SURPLUS TO CASH so so so DEPICIT To OPERATING LOAN $65,167 $98,411 $118,298 =338882888388=83.838838========8================B======================= 253 TABLE 11. PROJECTED NET WORTH STATEMENT BEGINNING OP YEAR >>>>>>>>> 1985 1986 1987 1988 09... ASSETS Of... -.. -.. ---- -- CURRENT ASSETS: CASH $1,000 so so so ACCOUNTS RECEIVABLE so so so so CROP INVENTORY $82,590 $82,590 $82,590 $82,590 PEEDER LIVESTOCK INV. so so so so TOTAL CURRENT ASSETS $83,590 $82,590 $82,590 $82,590 PIXED ASSETS: NARRETABLE SECURITIES so so so so BREEDING LIVESTOCK so so so so MACHINERY AT COST $174,997 $174,997 $174,997 $174,997 LESS:ACC. MACHINERY DEPR. $132,137 $152,904 $173,671 $194,438 BUILDINGS AT COST $102,722 $102,722 $102,722 $102,722 LESS:ACC. BUILDING DEPR. $49,026 $57,940 $66,854 $75,768 LAND $651,908 $651,908 $651,908 $651,908 OTHER $87,564 $87,564 $87,564 $87,564 TOTAL FIXED ASSETS $836,028 $806,347 $776,666 $746,985 TOTAL ASSETS $919,618 $888,937 $859,256 $829,575 0.... LIABILITIES ttttt CURRENT LIABILITIES: PRINC. DUE EXIST. LOANS $36,826 $41,207 $46,110 $51,107 PRINC. DUE NEW LOANS so so so OPERATING LOAN $65,167 $98,411 $118,298 TOTAL CURRENT LIABIL. $36,826 $106,374 $144,521 $169,405 LONG-TERM LIABILITIES: EXISTING LOANS $771,864 $730,657 $684,546 $633,439 NEW LOANS so $0 $0 TOTAL LONG-TERM LIABIL. $771,864 $730,657 $684,546 $633,439 TOTAL LIABILITIES $808,690 $837,031 $829,067 $802,844 OWNER EQUITY $110,928 $51,906 $30,189 $26,731 TABLE 12. PROJECTED PINANCIAL PERFORMANCE PLANNING YEAR >>>>>>>>>>>> 1985 1986 1987 CASH POSITION: NET CASH PROM OPERATIONS ($29,616) $7,689 $25,948 NET CASH FLOW ($65,167) ($98,411) ($118,298) PROFITABILITY: NET EARNINGS AFTER TAXES ($59,297) ($21,992) ($3,733) FAMILY LABOR DRAW $18,115 $18,115 $18,115 RETURN ON TOTAL ASSETS 3.388 7.26% 9.10% RETURN ON OWNER EQUITY -72.83% -53.58% -13.12% FINANCIAL PROGRESS: CHANGE IN OWNER EQUITY ($59,022) ($21,717) ($3,458) OPERATING PERCENTAGES: TOTAL EXPENSES/INC. 126.37: 108.44% 99.49: EARNINGS AFTER TAx/INC. -26.378 -8.44: -1.34% DEBT SERVICING/INC. 56.35% 73.63% 80.58% BEGINNING OP YEAR >>>>>>>> 1985 1986 1987 1988 LIQUIDITY: WORKING CAPITAL $46,764 ($23,784) ($61,931) ($86,815) CURRENT RATIO 2.27 0.78 0.57 0.49 ACID TEST RATIO 0.03 0.00 0.00 0.00 CURRENT DEBT/TOTAL DEBT 4.55% 12.71: 17.43% 21.108 SOLVENCY: NET CAPITAL RATIO 1.14 1.06 1.04 1.03 EQUITY To ASSET RATIO 0.12 0.06 0.04 0.03 DEBT TO ASSET RATIO 0.88 0.94 0.96 0.97 APPENDIX C BASE RUN FOR HOG PAR! CASE 254 APPENDIX C CAPITAL/PROFIT PLAN DEVELOPED BY: RALPH E. BEPP EXTENSION ECONOMIST DEPARTMENT OF AGRICULTURAL ECONOMICS MICHIGAN STATE UNIVERSITY PLAN DEVELOPED FOR NAME: BOG FARM CASE BASE RUN ADDRESS: CITY: STATE: ZIP CODE: FIRST PLANNING YEAR: 1985 TABLE 1. ENTERPRISE LIST FOR THE FARM A. FEEDER LIVESTOCK B. BREEDING LIVESTOCK ' 1. SOWS C. CROPS 1. CORN 2. OATS 3. BAY 4. PASTURE PRESS: {ALTHH} TABLE 2. Qt... ASSETS 4...: CURRENT ASSETS: CASE ACCOUNTS RECEIVABLE CROP INVENTORY: KIND CORN OATS BAY PASTURE TOTAL CROP INVENTORY FEEDER LIVESTOCK INV.: KIND TOTAL FEEDER LIVESTOCK TOTAL CURRENT ASSETS FIXED ASSETS: BREEDING LIVESTOCK INV.: KIND SONS 255 BEGINNING NET NORTH STATEMENT QUANTITY UNIT 16667 BU. 1233 BU. 10 TON 10 ACRE QUANTITY UNIT READ BEAD QUANTITY UNIT 162 BEAD HEAD TOTAL BREEDING LIVESTOCK KIND MARKETABLE SECURITIES MACHINERY BUILDINGS 6 IMPROVEMENTS LAND OTHER TOTAL FIXED ASSETS TOTAL ASSETS if... LIABILITIES ii... LENDER COST ACCUMULATED P.C.A. Fm.H.A. Fm.H.A. FOLOBO INDIVIDUALS OTHER TOTAL LIABILITIES OWNER EQUITY BASIS DEPREC. $162,350 $70,548 $66,682 $11,471 $0 $0 $0 $0 INTEREST SECURITY RATE PERSONAL 13.00% LIVESTK. 10.25% LAND 7.25% LAND 13.00% LAND 10.00% PERSONAL 15.00% S/UNIT $2.65 $2.00 $50.00 $24.00 $/UNIT $/UNIT $352.22 $91,802 $55,211 $0 $0 TERM IN YEARS 30.0 VALUE $1,000 $0 $44,168 $2,466 $500 $240 $47,374 $48,374 $57,060 $0 $57,060 MARKET VALUE $92,500 $55,211 $269,391 $80,960 $555,122 $603,495 PRINCIPAL BALANCE $19,000 $43,500 $43,500 $108,760 $147,000 $4.686 $366,446 $237,049 256 TABLE 3. ANNUAL PLANNING DATA FOR FEEDER LIVESTOCK PLANNING YEAR >>>>>>>>>>>>> 1985 1986 1987 FEEDER LIVESTOCK ENTERPRISE )>)>> NUMBER OF HEAD: PUCHASED SOLD ENDING INVENTORY PRICE PER HEAD: PURCHASED SOLD ENDING INVENTORY LIVESTOCK EXPENSES PER HEAD OUTPUT VALUES: BEGINNING INVENTORY $0 $0 $0 PURCHASED $0 $0 $0 SALES $0 $0 $0 ENDING INVENTORY $0 $0 $0 CHANGE IN INVENTORY $0 $0 $0 LIVESTOCK EXPENSES $0 $0 $0 FEEDER LIVESTOCK ENTERPRISE )>>>> NUMBER OF HEAD: PUCHASEE SOLD ENDING INVENTORY PRICE PER HEAD: PURCHASED SOLD ENDING INVENTORY LIVESTOCK EXPENSES PER HEAD OUTPUT VALUES: BEGINNING INVENTORY $0 $0 $0 PURCHASED $0 $0 $0 SALES $0 $0 $0 ENDING INVENTORY $0 $0 $0 CHANGE IN INVENTORY $0 $0 $0 LIVESTOCK EXPENSES $0 $0 $0 TABLE 4. ANNUAL PLANNING DATA FOR BREEDING LIVESTOCK PLANNING YEAR >>>>>>>>>>>>> 1985 1986 1987 BREEDING LIVESTOCK ENTERPRISE >>>>> SONS NUMBER OF BREEDING ANIMALS: PRODUCING OUTPUT 162 162 162 ON ENDING INVENTORY 162 162 162 PRIMARY OUTPUT: QUANTITY PER HEAD 27.00 27.00 27.00 PRICE PER UNIT $46.70 $48.19 $58.73 OTHER INCOME PER HEAD $68.97 $71.17 $86.74 CAPITAL GAIN INCOME PER HEAD $69 $71 $87 LIVESTOCK EXPENSES PER HEAD $343 $393 $443 OUTPUT VALUES: BEGINNING INVENTORY $57,060 $57,060 $57,060 SALES PRIMARY OUTPUT $204,266 $210,783 $256,885 SALES OTHER OUTPUT $11,173 $11,530 $14,052 ENDING INVENTORY $57,060 $57,060 $57,060 CHANGE IN INVENTORY $0 $0 $0 LIVESTOCK EXPENSES $55,566 $63,666 $71,766 BREEDING LIVESTOCK ENTERPRISE >>>>> NUMBER OF BREEDING ANIMALS: PRODUCING OUTPUT ON ENDING INVENTORY PRIMARY OUTPUT: QUANTITY PER HEAD PRICE PER UNIT OTHER INCOME PER HEAD CAPITAL GAIN INCOME PER HEAD LIVESTOCK EXPENSES PER HEAD OUTPUT VALUES: BEGINNING INVENTORY SO $0 $0 SALES PRIMARY OUTPUT $0 $0 $0 SALES OTHER OUTPUT $0 $0 $0 ENDING INVENTORY $0 $0 $0 CHANGE IN INVENTORY $0 $0 $0 LIVESTOCK EXPENSES $0 $0 $0 I..=".......8888-.--883.3..88=‘8:338:83I 25T7 TABLE 5. ANNUAL PLANNING DATA POR CROPS PLANNING YEAR >>>>>>>>>>>>> 1985 1906 1987 CROP ACRES RARVESTEE CORN 410 410 410 OATS HAY PASTURE 10 10 10 TOTAL CROP ACRES 420 420 420 CROP ACRES OWNED 146 146 146 CROP ACRES TO LEASE 274 274 274 CROP YIELD PER ACRE CORN 90.0 90.0 90.0 OATS 60.0 60.0 60.0 HAY 2.0 2.0 2.0 PASTURE 1.0 1.0 1.0 tifitittttt LIVESTOCK NUMBERS *******t*** A. PEEDER LIVESTOCK 1. 0 0 0 2. 0 0 0 B. BREEDING LIVESTOCK 1. sows 162 162 162 2. 0 0 0 C. CROPS CROP PRODUCTION *********** 1. CORN 36900 36900 36900 2. OATS 0 0 0 3. HAY 0 0 0 4. PASTURE 10 10 10 5. 0 0 0 6. 0 0 0 7. 0 0 0 8. 0 0 0 CROP QUANTITY To PEED CORN 31590 31590 31590 OATS HAY PASTURE 10 10 10 CROP QUANTITY To SELL CORN 5310 5310 5310 OATS 1233 HAY 10 PASTURE 258 CROP QUANTITY TO PURCHASE CORN 9658 OATS HAY PASTURE CROP QUANTITY ON ENDING INVENTORY CORN 26325 26325 26325 OATS 0 0 0 HAY 0 0 0 PASTURE 10 10 10 0 0 0 0 0 0 0 0 0 0 0 0 CROP PRICE PER UNIT SOLD CORN $2.47 $2.81 $2.92 OATS $2.00 HAY $70.00 PASTURE CROP PRICE PER UNIT PURCHASED CORN $2.67 OATS HAY PASTURE CROP CROP EXPENSES PER ACRE CORN $77 $77 $77 OATS HAY PASTURE $8 $8 $8 OUTPUT VALUES: BEGINNING INVENTORY $47,374 $70,001 $70,001 PURCHASES $25,787 $0 $0 SALES $16,282 $14,921 $15,505 ENDING INVENTORY $70,001 $70,001 $70,001 CHANGE IN INVENTORY $22,628 $0 $0 CROP EXPENSES $31,650 $31,650 $31,650 259 TABLE 6. ANNUAL LABOR REQUIREMENTS ENTERPRISE LABOR/BNT. 1985 1986 1987 0 0 0 . 0 0 0 SONS 28.0 4536 4536 4536 0 0 0 CORN 5.6 2296 2296 2296 OATS 0 0 0 HAY 0 0 0 PASTURE 1.0 10 10 10 0 0 0 0 0 0 0 0 0 0 0 0 TOTAL LABOR HOURS NEEDED 6842 6842 6842 TOTAL LABOR HOURS AVAILABLE 5642 5642 5642 TABLE 7. ANNUAL CAPITAL PURCHASES AND LOAN DATA 1985 1986 1987 3-YEAR PROPERTY: ---- ---- ---- AMOUNT PURCHASED YEARS TO RBPAY LOAN INTEREST RATE ON LOAN 5-YEAR PROPERTY: AMOUNT PURCHASED YEARS TO REPAY LOAN INTEREST RATE ON LOAN 18-YEAR PROPERTY: AMOUNT PURCHASED YEARS TO RBPAY LOAN INTEREST RATE ON LOAN LAND NON-DEPRECIABLE: AMOUNT PURCHASED YEARS TO RBPAY LOAN INTEREST RATE ON LOAN TABLE 8. ANNUAL INCOME/EXPENSE ITEMS ***** INCOME ***** 1985 1986 1987 OTHER FARM INCOME $0 $0 $0 NON-FARM INCOME $0 $0 $0 fiiifii EXPENSES i**** LABOR: HIRED LABOR $6,000 $6,000 $6,000 FAMILY LABOR DRAW $15,000 $15,000 $15,000 TOTAL LABOR $21,000 $21,000 $21,000 MACHINERY 8 IMPROVEMENTS: REPAIRS, MAINTENANCE $8,707 $9,836 $10,956 CUSTOM HIRE 5 LEASE $918 .5918 $918 STORAGE, WAREHOUSING PAST INSURANCE YEAR $1,238 $1,238 $1,238 FUEL, OIL & GREASE ---- $8,410 $8,410 $8,410 DEPR. MACHINERY $14,335 $14,335 $14,335 $14,335 DEPR. IMPROVEMENTS $4,246 $4,246 $4,246 $4,246 TOTAL MACH. 8 IMP. $37,854 $38,983 $40,103 OVERHEAD: PROPERTY TAXES $3,471 $3,471 $3,471 UTILITIES $1,378 $1,378 $1,378 INTEREST $39,624 $38,544 $37,339 LAND LEASE $13,426 $13,426 $13,426 MISCELLANEOUS $2,383 $2,382 $2,382 TOTAL OVERHEAD $60,282 $59,201 $57,996 26C) 1985 1986 1987 NUMBER OF TAxABLE PARTNERS 1 1 1 DESCRIPTION OF PLAN: NAME: BOG FARM CASE BASE RUN ADDRESS: CITY: STATE: zIP CODE: TABLE 9. PROJECTED INCOME STATEMENT PLANNING—YEAR >>>>>>>>>> 1985 1986 1987 it... INCOME tiff. SALES: CASE CROPS $16,282 $14,921 $15,505 FEEDER LIVESTOCR so so so LIVESTOCR PRODUCTS $215,439 $222,313 $270,937 OTEER FARM INCOME so $0 $0 TOTAL SALES $231,721 $237,234 $286,442 COST OF FEEDERS/CROPS PURCH. $25,787 so so CHANGE IN INVENTORY $22,628 so so GROSS INCOME $228,561 $237,234 $286,442 fififiii EXPENSES iiiit LABOR $21,000 $21,000 $21,000 MACEINERY 0 IMPROVEMENTS $37,854 $38,983 $40,103 CROP $31,650 $31,650 $31,650 LIVESTOCR $55,566 $63,666 $71,766 OVERHEAD $60,282 $59,201 $57,996 TOTAL ExPENSES $206,352 $214,500 $222,515 iiiti NET iiitfi NET CASE INCOME $18,163 $41,315 $82,508 NET EARNINGS $22,209 $22,734 $63,927 SELP-EMPLOYMENT TAxES $477 $3,672 $9,077 INCOME TAxES s95 $4,687 $19,228 NET EARNINGS AFTER TAxES $21,638 $14,375 $35,622 *fitfii NON-PW *iiii NON-FARM INCOME $0 so so TABLE 10. CASE FLOW RECONCILIATION STATEMENT BEGINNING CASE BALANCE $1,000 $8,981 $31,246 NET CASE FROM OPERATIONS $17,591 $32,956 $54,203 NET CASE FROM NON-FARM $0 $0 $0 MONEY BORROWED so so so PRINCIPAL PAYMENTS $9,610 $10,691 $11,896 CAPITAL PURCHASES ' 3 $0 NET CASE FLOW $8,981 $31,246 $73,554 SURPLUS TO CASE $8,981 $31,246 $73,554 DEFICIT TO OPERATING LOAN so so so 261 TABLE 11. PROJECTED NET WORTH STATEMENT BEGINNING OF YEAR >>>>>>>>> 1985 1986 1987 1988 at... ASSETS 00000 ---- ---- ---- ---- CURRENT ASSETS: CASH $1,000 $8,981 $31,246 $73,554 ACCOUNTS RECEIVABLE $0 $0 $0 $0 CROP INVENTORY $47,374 $70,001 $70,001 $70,001 FEEDER LIVESTOCK INV. $0 $0 $0 $0 TOTAL CURRENT ASSETS $48,374 $78,982 $101,247 $143,555 FIXED ASSETS: MARRETABLE SECURITIES so so $0 $0 BREEDING LIVESTOCK $57,060 $57,060 $57,060 $57,060 MACHINERY AT COST $162,350 $162,350 $162,350 $162,350 LESS:ACC. MACHINERY DEPR. $70,548 $84,883 $99,218 $113,553 BUILDINGS AT COST $66,682 $66,682 $66,682 $66,682 LESS:ACC. BUILDING DBPR. $110471 $150717 $191963 $24,209 LAND $269,391 $269,391 $269,391 $269,391 OTHER $80,960 $80,960 $80,960 $80,960 TOTAL FIXED ASSETS $554,424 $535,843 $517,262 $498,681 TOTAL ASSETS $602,797 $614,825 $618,509 $642,235 00000 LIABILITIES 00400 CURRENT LIABILITIES: PRINC. DUE EXIST. LOANS $9,610 $10,691 $11,896 $13,240 PRINC. DUE NEW LOANS $0 $0 $0 OPERATING LOAN $0 $0 $0 TOTAL CURRENT LIABIL. $9,610 $10,691 $11,896 $13,240 LONG-TERM LIABILITIES: EXISTING LOANS $356,836 $346,145 $334,249 $321,009 NEW LOANS $0 $0 $0 TOTAL LONG-TERM LIABIL. $356,836 $346,145 $334,249 $321,009 TOTAL LIABILITIES $366,446 $356,836 $346,145 $334,249 OWNER EQUITY $236,351 $257,989 $272,364 $307,986 TABLE 12. PROJECTED FINANCIAL PERFORMANCE PLANNING YEAR >>>>>>>>>>>> 1985 1986 1987 CASE POSITION: NET CASH FROM OPERATIONS $17,591 $32,956 $54,203 NET CASH FLOW $8,981 $31,246 $73,554 PROFITABILITY: NET EARNINGS AFTER TAXES $21,638 $14,375 $35,622 FAMILY LABOR DRAW $15,000 $15,000 $15,000 RETURN ON TOTAL ASSETS 10.06% 8.58% 11.57% RETURN ON OWNER EQUITY 8.758 5.42% 12.28% FINANCIAL PROGRESS: CHANGE IN OWNER EQUITY $21,638 $14,375 $35,622 OPERATING PERCENTAGES: TOTAL EXPENSES/INC. 90.28% 90.42% 77.68% EARNINGS AFTER TAX/INC. 9.47% 6.06% 12.44% DEBT SERVICING/INC. 21.54% 20.75% 17.19% BEGINNING OF YEAR >>>>>>>> 1985 1986 1987 1988 LIQUIDITY: WORKING CAPITAL $38,763 $68,291 $89,352 $130,315 CURRENT RATIO 5.03 7.39 8.51 10.84 ACID TEST RATIO 0.10 0.84 2.63 5.56 CURRENT DEBT/TOTAL DEBT 2.62% 3.00% 3.44% 3.96% SOLVENCY: NET CAPITAL RATIO 1.64 1.72 1.79 1.92 EQUITY TO ASSET RATIO 0.39 0.42 0.44 0.48 DEBT TO ASSET RATIO 0.61 0.58 0.56 0.52 APPENDIX D BASE RUN FOR DAIRY FAR! CASE ,262 APPENDIX D CAPITAL/PROFIT PLAN DEVELOPED BY: RALPH E. BEPP EXTENSION ECONOMIST DEPARTMENT OF AGRICULTURAL ECONOMICS MICHIGAN STATE UNIVERSITY PLAN DEVELOPED FOR NAME: DAIRY FARM CASE BASE RUN ADDRESS: CITY: STATE: ZIP CODE: FIRST PLANNING YEAR: 1985 TABLE 1. ENTERPRISE LIST FOR THE FARM A. FEEDER LIVESTOCK 1. 2. B. BREEDING LIVESTOCK 1. DAIRY 2. C. CROPS 1. CORN 2. CORN SILAGE 3. BAY 4. 5. 6. 7. 8. PRESS: {ALT}{M} TABLE 2. 0t... ASSETS 0.000 CURRENT ASSETS: CASH ACCOUNTS RECEIVABLE CROP INVENTORY: KIND CORN CORN SILAGE HAY TOTAL CROP INVENTORY FEEDER LIVESTOCK INV.: KIND TOTAL FEEDER LIVESTOCK TOTAL CURRENT ASSETS FIXED ASSETS: BREEDING LIVESTOCK KIND DAIRY 2(13 BEGINNING NET WORTH STATEMENT QUANTITY UNIT 2000 BU. 100 TON 600 TON QUANTITY UNIT HEAD HEAD QUANTITY UNIT 112 HEAD HEAD TOTAL BREEDING LIVESTOCK KIND MARKETABLE SECURITIES MACHINERY BUILDINGS 8 IMPROVEMENTS LAND OTHER TOTAL FIXED ASSETS TOTAL ASSETS ***** LIABILITIES ***** ACCOUNTS PAYABLE BANKS FmHA FmHA INDIVIDUAL OTHER TOTAL LIABILITIES OWNER EQUITY =...=: ....— COST ACCUMULATED BASIS $316,435 $222,689 $0 $77,888 SECURITY BLDGS & IMP LAND LAND PERSONAL DEPREC. $214,611 $98,876 $0 $0 INTEREST RATE 18.00% 12.00% 7.25% 7.25% 10.00% 13.00% $20.00 $50.00 S/UNIT $/UNIT 310065.00 $0 $101,824 $123,813 $0 $77,888 TERM IN YEARS VALUE $0 $8,288 $5,300 $2,000 $30,000 $0 $0 $0 $0 $0 $37,300 $45,588 $164,080 $0 $164,080 MARKET VALUE $200,000 $123,813 $216,299 $77,888 $782,080 $827,668 PRINCIPAL BALANCE $33,805 $27,729 $386,530 $364,403 $97,418 $12,390 $922,275 ($94,607) i:====8=83=================g============================= 264 TABLE 3. ANNUAL PLANNING DATA FOR FEEDER LIVESTOCK ...-... - PLANNING YEAR >>>>>>>>>>>>> 1985 1986 1987 FEEDER LIVESTOCK ENTERPRISE >>>>> NUMBER OF READ: PUCHASED SOLD ENDING INVENTORY PRICE PER HEAD: PURCEASED SOLD ENDING INVENTORY LIVESTOCK EXPENSES PER HEAD OUTPUT VALUES: BEGINNING INVENTORY $0 $0 $0 PURCHASED $0 so so SALES $0 $0 $0 ENDING INVENTORY so $0 $0 CHANGE IN INVENTORY $0 $0 $0 LIVESTOCK EXPENSES $0 $0 $0 FEEDER LIVESTOCK ENTERPRISE >>>>> NUMBER OP HEAD: PUCHASED SOLD ENDING INVENTORY PRICE PER EEAD: PURCEASED SOLD ENDING INVENTORY LIVESTOCK EXPENSES PER HEAD OUTPUT VALUES: BEGINNING INVENTORY $0 $0 $0 PURCHASED $0 $0 $0 SALES $0 $0 $0 ENDING INVENTORY $0 $0 $0 CHANGE IN INVENTORY $0 $0 $0 LIVESTOCK EXPENSES $0 $0 $0 TABLE 4. ANNUAL PLANNING DATA POR BREEDING LIVESTOCK PLANNING YEAR >>>>>>>>>>>>> 1985 1986 1987 BREEDING LIVESTOCK ENTERPRISE >>>>> DAIRY NUMBER OP BREEDING ANIMALS: PRODUCING OUTPUT 112 112 112 ON ENDING INVENTORY 112 112 112 PRIMARY OUTPUT: ‘ QUANTITY PER EEAD 141.00 141.00 141.00 PRICE PER UNIT $12.87 $12.50 $12.95 OTEER INCOME PER HEAD $211.24 $244.62 $289.80 CAPITAL GAIN INCOME PER HEAD $171 $197 $233 LIVESTOCK EXPENSES PER HEAD $407 $456 $506 OUTPUT VALUES: BEGINNING INVENTORY $164,080 $164,080 $164,080 SALES PRIMARY OUTPUT $203,243 $197,400 $204,506 SALES OTHER OUTPUT $23,659 $27,397 $32,458 ENDING INVENTORY $164,080 $164,080 $164,080 CHANGE IN INVENTORY $0 so so LIVESTOCK EXPENSES $45,584 $51,072 $56,672 BREEDING LIVESTOCK ENTERPRISE >>>>> NUMBER OF BREEDING ANIMALS: PRODUCING OUTPUT ON ENDING INVENTORY PRIMARY OUTPUT: QUANTITY PER HEAD PRICE PER UNIT OTHER INCOME PER HEAD CAPITAL GAIN INCOME PER EEAD LIVESTOCK EXPENSES PER HEAD OUTPUT VALUES: BEGINNING INVENTORY $0 $0 $0 SALES PRIMARY OUTPUT so so so SALES OTEER OUTPUT so so so ENDING INVENTORY $0 $0 $0 CHANGE IN INVENTORY so so so LIVESTOCK EXPENSES so so so 26E5 TABLE 5. ANNUAL PLANNING DATA POR CROPS PLANNING YEAR >>>>>>>>>>>>> 1985 1986 1987 CROP ACRES BARVESTED CORN 200 200 200 CORN SILAGE 103 103 103 EAY 202 202 202 TOTAL CROP ACRES 505 505‘ 505 CROP ACRES OWNED 232 232 232 CROP ACRES TO LEASE 273 273 273 CROP YIELD PER ACRE CORN 80.0 80.0 80.0 CORN SILAGE 10.0 10.0 10.0 RAY 4.0 4.0 4.0 Ottittfiiti LIVESTOCK NUHBERS ttfittiiittt A. PEEDER LIVESTOCK 1. o o o 2. O 0 0 B. BRERBING LIVESTOCK 1. DAIRY 112 112 112 2. 0 0 0 c. CROPS CROP PRODUCTION *********** 1. CORN 16000 16000 16000 2. CORN SILAGE 1030 1030 1030 3. BAY 808 808 808 4. o 0 0 5. 0 0 0 6. 0 o 0 7. 0 0 o 8. 0 o o CROP QUANTITY TO REED CORN 13877 12320 12320 CORN SILAGE 272 1030 1030 RAY 935 806 806 CROP QUANTITY To SELL CORN 3639 3600 3600 CORN SILAGE BAY 67 266 CROP QUANTITY TO PURCHASE CORN 9783 CORN SILAGE ' HAY CROP QUANTITY ON ENDING INVENTORY CORN 10267 10347 10427 CORN SILAGE 858 858 858 HAY 406 408 410 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 CROP PRICE PER UNIT SOED CORN $2.47 $2.81 $2.92 CORN SILAGE HAY $50.00 CROP PRICE PER UNIT PURCHASED CORN $2.67 CORN SILAGE BAY CROP CROP EXPENSES PER ACRE CORN $68 $68 $68 CORN SILAGE $65 $65 $65 HAY $46 $46 $46 OUTPUT VALUES: BEGINNING INVENTORY $37,300 $64,668 $64,980 PURCHASES $26,121 $0 $0 SALES $12,338 $10,116 $10,512 ENDING INVENTORY $64,668 $64,980 565:292 CHANGE IN INVENTORY $27,368 $312 $312 CROP EXPENSES $29,587 $29,587 $29,587 2(Y7 TABLE 6. ANNUAL LABOR REQUIREMENTS ENTERPRISE LABOR/ENT. 1985 1986 1987 0 o 0 0 0 0 DAIRY 55.1 6171 6171 6171 0 o 0 CORN 5.7 1140 1140 1140 CORN SILAGE 8.1 834 834 834 HAY 8.7 1757 1757 1757 0 0 0 o 0 0 o o 0 0 0 o 0 o 0 TOTAL LABOR HOURS NEEDED 9903 9903 9903 TOTAL LABOR HOURS AVAILABLE 9892 9892 9892 TABLE 7. ANNUAL CAPITAL PURCHASES AND LOAN DATA 1985 1986 1987 3-YEAR PROPERTY: --- -- --- AMOUNT PURCHASED YEARS TO REPAY LOAN INTEREST RATE ON LOAN 5-YEAR PROPERTY: AMOUNT PURCHASED YEARS To REPAY LOAN INTEREST RATE ON LOAN 18-YEAR PROPERTY: AMOUNT PURCHASER YEARS TO REPAY LOAN INTEREST RATE ON LOAN LAND NON-DEPRECIAHLE: AMOUNT PURCHASED YEARS TO REPAY LOAN INTEREST RATE ON LOAN TABLE 8. ANNUAL INCOME/EXPENSE ITEMS ***** INCOME ***** 1985 1986 1987 OTHER EARN INCOME $6,458 $6,458 $6,458 NON-EARN INCOME $2,675 $2,675 $2,675 CC... EXPENSES Ct... LABOR: HIRED LABOR $23,560 $23,560 $23,560 PAMILY LABOR DRAN $12,000 $12,000 $12,000 TOTAL LABOR $35 560 $35 560 MACHINERY a IMPROVEMENTS: ' ' 335'560 REPAIRS, MAINTENANCE $17,456 $17,456 $17,456 CUSTOM HIRE a LEASE $650 $650 $650 STORAGE, WAREHOUSING PAST INSURANCE YEAR $2,540 $2,540 $2,540 PUEL, OIL 6 GREASE ---- $14,529 $14,529 $14,529 DEPR. MACHINERY $29,184 $29,184 $29,184 $29,184 DEPR. IMPROVEMENTS $10,919 $10,919 $10,919 $10,919 TOTAL MACH. a IMP. $75 278 75 7 OVERHEAD: , $ ,2 8 $75,278 PROPERTY TAXES $6,458 $6,458 $6,458 UTILITIES $6,616 $6,616 $6,616 INTEREST $75,208 $67,359 $65,426 LAND LEASE $4,425 $4,425 $4,425 MISCELLANEOUS $2,372 $2,372 $2,372 TOTAL OVERHEAD $95,079 $87,230 $85,297 1985 1986 1987 NUMBER OP TAXABLE PARTNERS 1 1 1 DESCRIPTION OP PLAN: NAME: DAIRY PARM CASE BASE RUN ADDRESS: CITY: STATE: zIP CODE: TABLE 9. PROJECTED INCOME STATEMENT PLANNING YEAR >>>>>>>>>> 1985 1986 1987 tittt INCOHE Ottti .. - -- --- SALES: CASH CROPS $12,338 $10,116 $10,512 PEEDER LIVESTOCK $0 $0 $0 LIVESTOCK PRODUCTS $226,902 $224,797 $236,964 OTHER PARM INCOME $6,458 $6,458 $6,458 TOTAL SALES $245,698 $241,371 $253,934 COST OP PEEDERS/CROPS PURCH. $26,121 $0 $0 CHANGE IN INVENTORY $27,368 $312 $312 GROSS INCOME $246,945 $241,683 $254,246 ”‘fitt EXPENSES 9...! LABOR $35,560 $35,560 $35,560 MACHINERY & IMPROVEMENTS $75,278 $75,278 $75,278 CROP $29,587 $29,587 $29,587 LIVESTOCK $45,584 $51,072 $56,672 OVERHEAD $95,079 $87,230 $85,297 TOTAL EXPENSES $281,088 $278,727 $282,394 tittt NET tittt NET CASH INCOME ($21,407) $2,748 $11,643 NET EARNINGS ($34,142) ($37,043) ($28,148) SELP-EMPLOYMENT TAXES $0 $0 $0 INCOME TAXES $0 $0 $0 NET EARNINGS AFTER TAXES ($34,142) ($37,043) ($28,148) ttitt NON-PAR“ ititi NON'PARM INCOME $29675 $27675 $29675 TABLE 10. CASH FLOW RECONCILIATION STATEMENT BEGINNING CASH BALANCE $0 $0 $0 NET CASH PROM OPERATIONS ($21,407) $2,748 $11,643 NET CASH PROM NON-PARM $2,675 $2,675 $2,675 MONEY BORROWED $0 $0 $0 PRINCIPAL PAYMENTS $53,536 $93,763 $111,767 CAPITAL PURCHASES $0 $0 $0 NET CASH FLOW ($72,268) ($88,340) ($97,449) SURPLUS TO CASH $0 $0 $0 DEPICIT TO OPERATING LOAN $72,268 $88,340 $97,449 2159 TABLE 11. PROJECTED NET WORTH STATEMENT BEGINNING—OP YEAR >>>>>>>>> 1985 1986 1987 1988 if... ASSETS Oi... --.. ---- ---- --.. CURRENT ASSETS: CASH $0 $0 $0 $0 ACCOUNTS RECEIVABLE $8,288 $8,288 $8,288 $8,288 CROP INVENTORY $37,300 $64,668 $64,980 $65,292 PEEDER LIVESTOCK INV. $0 $0 $0 $0 TOTAL CURRENT ASSETS $45,588 $72,956 $73,268 $73,580 PIXED ASSETS: MARKETABLE SECURITIES $0 $0 $0 $0 BREEDING LIVESTOCK $164,080 $164,080 $164,080 $164,080 MACHINERY AT COST $316,435 $316,435 $316,435 $316,435 LESS:ACC. MACHINERY DEPR. $214,611 $243,795 $272,979 $302,163 BUILDINGS AT COST $222,689 $222,689 $222,689 $222,689 LESS:ACC. BUILDING DEPR. $98,876 $109,795 $120,714 $131,633 LAND $216,299 $216,299 $216,299 $216,299 OTHER 377,888 $77,888 $77,888 $77,888 TOTAL PIXED ASSETS $683,904 $643,801 $603,698 $563,595 TOTAL ASSETS $729,492 $716,757 $676,966 $637,175 .9... LIABILITIES .9... CURRENT LIABILITIES: PRINC. DUE EXIST. LOANS $53,536 $21,495 $23,428 $25,546 PRINC. DUE NEW LOANS $0 $0 $0 OPERATING LOAN $72,268 $88,340 $97,449 TOTAL CURRENT LIABIL. $53,536 $93,763 $111,767 $122,996 LONG—TERM LIABILITIES: EXISTING LOANS $868,739 $847,244 $823,817 $798,270 NEW LOANS $0 $0 $0 TOTAL LONG-TERM LIABIL. $868,739 $847,244 $823,817 $798,270 TOTAL LIABILITIES $922,275 $941,007 $935,584 $921,266 OWNER EQUITY ($192,783) ($224,250) ($258,618) ($284,091) TABLE 12. PROJECTED PINANCIAL PERPORMANCE PLANNING YEAR ))>>>>>>>>>> 1985 1985 1987 CASH POSITION: NET CASH PROM OPERATIONS ($21,407) $2,748 $11,643 NET CASH PLOW ($72,268) ($88,340) ($97,449) PROPITABILITY: NET EARNINGS APTER TAXES ($34,142) ($37,043) ($28,148) PAMILY LABOR DRAW $12,000 $12,000 $12,000 RETURN ON TOTAL ASSETS 5.684 4.354 5.674 RETURN 0N OWNER EQUITY 16.374 15.344 10.374 PINANCIAL PROGRESS: CHANGE IN OWNER EQUITY ($31,467) ($34,368) ($25,473) OPERATING PERCENTAGES: TOTAL EXPENSES/INC. 113.834 115.334 111.074 EARNINGS APTER TAX/INC. -13.834 -15.334 -11.074 DEBT SERVICING/INC. 52.134 66.674 69.694 BEGINNING OP YEAR >>>>>>>> 1985 1986 1987 1988 LIQUIDITY: wORKING CAPITAL ($7,948) ($20,807) ($38,500) ($49,416) CURRENT RATIO 0.85 0.78 0.66 0.60 ACID TEST RATIO 0.15 0.09 0.07 0.07 CURRENT DEBT/TOTAL DEBT 5.804 9.964 11.954 13.354 SOLVENCY: NET CAPITAL RATIO 0.79 0.76 0.72 0.69 EQUITY To ASSET RATIO -0.26 -0.31 -0.38 -0.45 DEBT TO ASSET RATIO 1.26 1.31 1.38 1.45 BIBLIMRAPBY 10. 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