Michigan Farm News

Dollars and Sense: GreenStone FCS

Columnists, Markets & Weather

2018-11-15 181

GreenStone FCS | November 15, 2018

Steve Kluemper, Vice President of Credit | GreenStone Farm Credit Services

dairy-farm-mfn-2018
If you operate a dairy farm, you may find that the best return comes from the milk cows and raising heifers has a low asset turnover. If so, you may consider moving your heifers off site and using the space for the milk cows. | Meg Sprague Photography

As we continue another harvest with low commodity prices, most producers are wondering where to look next to maximize their profitability. In most cases, the low-hanging fruit of expense cutting has been done.  Finding those areas where additional gains can be realized requires more insight and evaluation of your business.

Using financial metrics to analyze the performance of your assets can help you determine where you can maximize profitability and minimize the amount of ineffective assets. The two commonly used metrics to determine the profitability of your assets are the Asset Turnover Ratio and the Operating Profit Margin Ratio.

Understanding how these two metrics effect the profitability of your operation can help you uncover areas to minimize losses or increase gains. While computing these ratios on your entire operation can help you see the overall results of the metrics, to do a more thorough analysis, each segment of the business (crops, livestock, replacement animals, etc.) should be reviewed for its own impact on the entire operation.

The Asset Turnover Ratio shows how efficiently you are using your assets to generate revenues and is calculated by dividing annual gross revenues by total assets to show revenues as a percent of assets. Producers should target an Asset Turnover Ratio of at least 20 - 40 percent.  A high turnover ratio percentage indicates you are getting more revenue out of your assets.

Conversely, a lower turnover ratio percentage indicates the assets need to be more productive or they need to be downsized so that the capital investment in the asset can be redeployed to other areas with better turnover.

The Operating Profit Margin Ratio indicates what revenues make it to the bottom line and is calculated  by dividing your net income after operating and depreciation expenses and owner withdrawals but before interest and income tax expenses by annual gross revenues. This is expressed to show your operating profit margin as a percentage of revenues.  Producers should target an Operating Profit Margin Ratio of at least 10 – 20 percent.  This ratio can help you see the effect that minimizing expenses has on the overall profitability of the operation.

Using these two metrics individually and in combination can help identify areas where the farm operates well and can be expanded and also areas that may be costing more than is realized in income.

A Return on Assets is calculated by multiplying the Asset Turnover Ratio by the Operating Profit Margin Ratio.  Producers should target a Return on Assets of at least 3 – 6 percent.  A high Return on Assets can be achieved preferably by having a high Asset Turnover Ratio and a high Operating Profit Margin Ratio.  However, having one ratio that is low but offset by the other that is high enough to generate an acceptable Return on Assets is another way to generate acceptable profitability. 

Producers can evaluate the effectiveness of the capital being deployed to keep assets on the farm by using these metrics to take some of the emotion out of the decision making if the operation determines activities that have been done for a long time may need to be reevaluated and redirected. 

Identifying highly productive assets can help you look for ways to maximize an area where you are doing well.  With this information you can improve or capture more profit on productive assets by pinpointing an area the farm can use to break away from relying solely on commodity markets of livestock, milk and crops.

Depending on the type of operation, areas that may have a low asset turnover ratio and low operating profit margin may involve machinery or equipment or buildings that sit idle or land or livestock that are not productive. For instance, if you need to improve your return on assets on machinery you may look at doing custom work or other services that utilize your assets and talents.

If you operate a dairy farm, you may find that the best return comes from the milk cows and raising heifers has a low asset turnover. If so, you may consider moving your heifers off site to a heifer raiser and using the space for the milk cows.

We are seeing more producers taking a closer look at what they do really well on the farm and finding ways to create a niche for their operation that solves a problem for another operation. From selling organic crops, raising heifers or providing custom hauling services, producers need to look beyond just “tightening the belt” to find ways to maximize the assets and investments they have and gain financial stability.

Because these types of decisions can have a large impact on your operation, it is critical that careful financial analysis is done on each asset prior to making major decisions. Often times many on farm practices are done based on tradition or routine, rather than financial efficiency.

The answer to the best asset to invest in will be different for each operation based on their own unique set of circumstances. Uncovering the next layer of profitability based on financial metrics may require the use of a consultant who has the expertise to calculate and evaluate the ratios and help you make decisions based on the outcomes of the analysis.

Columnists, Markets & Weather

2018-10-15 176

GreenStone FCS | October 15, 2018 

Joe Hickey | GreenStone Farm Credit Services

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This year’s report found prices for good farmland remained relatively stable throughout the territory, with a few outliers in high value areas. | Sheridan Realty & Auction Co.

Tracking the sale data generated from land purchases across Michigan and northeast Wisconsin allows our property appraisers to accurately value land for lending and other business purposes. This is critical to both the lender and the customer. To capture true land values we tabulate benchmark data in nine regions, segmented by land use within the territory. This specific data illustrates trends in the marketplace indicating areas where values may be fluctuating more than expected.

The data collected in the GreenStone territory is pooled with other Farm Credit associations to build a national database. We closely monitor land sales, both public and private, to gauge trends in the land values. Tracking this data annually keeps us aware of where values are headed and prevents any big surprises year after year.

The year-over-year change in values ranged from a 7.5 percent decrease in the northern thumb of Michigan to 6.3 percent increase in southwest Michigan. Land used for recreational purposes in northern Michigan saw a 12.5 percent increase in value.

Traditional Cropland

The benchmark study includes several traditional row crop parcels across the Lower Peninsula of Michigan and northeast Wisconsin. Values are determined for 80- acre parcels.

We see the continuing trend in our territory is that good quality farmland prices remain remarkably steady. While demand for land is still dependent largely on location, if it is next to a farm with a capacity to expand, it will sell with little negotiation for price.

The western region of northeast Wisconsin saw the third consecutive year of stable benchmark value, following consis- tent growth the previous nine years. Since 2006, an 80-acre cropland parcel has increased from $197,000 to today’s value of $375,000. In the southeast part of the northeast Wisconsin territory, the cropland benchmark (80 acres) value decreased for the third year after 12 and 18 percent increases in 2014 and 2015, to today’s ap- praised value of $520,000.

In Michigan, there was a 6.3 percent increase in the southwest, following a 7.7 percent decrease in 2017, bring the value to $408,000. The mid-Michigan area remained stable with no change at $424,000. Cash crop land in southern Michigan went unchanged for the third year holding at $280,000.

Michigan’s northern thumb area continues to hold the highest value of the regions at $576,000 ($7,200 per acre), marking a 7.5 percent decline this past year. The Saginaw Valley cash crop land in Michigan, on a per acre basis, had a slight 0.7 percent drop to $6,375, coming down from the highest value recorded in 2014 at $7,406.

The lower corn and soybean prices have stabilized the base rental rates in the Thumb region to the $200 to $225 range for properties with higher productive soils. We expected rates to decline, however with the continued competition for land, land owners have no motivation other than relationship loyalty to lower rates.

Dairy

The appraisal of the Michigan dairy with 1,600 freestalls on a 40-acre site showed a 5.5 percent decline to $4,500,000, down from the 10-year high of $5,200,000 in 2015. The 60 tie-stall and 40-acre site in Wisconsin showed no change for the second year, holding at $318,000.

Recreational

The 80-acre recreational benchmark land surveyed in northern Michigan saw a second year of increased value, coming in at $144,000 ($1,800 per acre) up from $128,000 in 2017. Recreational tracts for hunting, fishing and non-consumer uses are in demand in Wisconsin and northern Michigan.

The residential and recreational sales activity for loans has improved slightly in 2018. Demand for rural residential houses in the Thumb region attract hobby farm buyers and rural “estate” buyers. We are finding with income increasing, more high- income wage earners from neighboring cities are investing in real estate.

Transitional

GreenStone monitors three areas in the transitional land category southeast Michigan (Ann Arbor area); Lapeer County, Michigan; and Brown County, Wisconsin. Transitional land is defined as a property between uses with the current use likely to change.

The 40-acre tracts in Michigan showed modest gains with the land in the south- ern part of the state increasing 1.3 percent over 2017, to a value of $320,000 for the 40 acres; this increase follows double-digit growth in 2015 and 2016. Transitional land in Michigan’s thumb (Lapeer County) showed a slight decline of 2.0 percent to $160,000.

Other Revenues

As commodity prices remain poor, we are seeing some farmers look toward non-traditional avenues for profits, including specialized enterprises and energy-related opportunities. In the thumb region, organic and non-GMO production continues to develop with local growers developing a network to market their production. Demand for this pro- duction stems from egg producers, freezer beef feeding operations, specialty food retailers and large food grade milling companies.

Hickey is vice president and chief appraiser at GreenStone Farm Credit Services.

Columnists

GreenStone FCS | August 30, 2018 

Tyson Lemon | GreenStone Farm Credit Services

Leasing equipment, facilities or vehicles often can bring benefits to businesses looking to reduce costs, improve cash flow and maximize tax advantages. Understanding if a lease is best for your business requires individual consideration, but there are some overall benefits of leasing that may make it the right decision for you.

With a conventional equipment loan, you borrow money to buy equipment or a facility, compared to a lease where you rent the use of the equipment or building for a specific time period. Essentially, with a lease you pay a usage fee rather than paying interest on a loan. For most businesses, additional advantages are realized in accounting and tax purposes.

Additionally, leasing is an option for new buildings or other facilities. Using a lease to finance new buildings can accelerate appreciation and can also be useful when transitioning assets to the next generation. When looking to use a lease to purchase a building, it is best to have the lease in place prior to construction to ensure the best financing option and avoid transfer tax. 

Other advantages to leasing:

  • Pay nothing down – Instead of a down payment, you only make the first lease payment, leaving you with cash for other parts of your business.
  • Reduce your maintenance costs – By leasing equipment, you can update it regularly, helping to ensure you always have reliable, low-maintenance equipment.
  • Control your cash flow – Match lease payment schedules to suit your needs – even if you have uneven cash flow patterns.
  • Improve your balance sheet – With an operating lease, the equipment comes off your balance sheet and instead appears as an operating expense.
  • Create a new lease financing source – A lease line allows you to respond quickly to new equipment needs and leave your other lines of credit available for additional business uses.
  • Avoid price increases – Take advantage of the ability to lock in your costs over the life of the lease. 

While farms can realize benefits from leasing, it is not right for every purchase or every situation. If you are considering new equipment or facility purchases, it may be beneficial to talk to your lender about leasing options and the benefits they may provide to you.

Lemon is Regional VP of Sales and Customer Relations at Greenstone Farm Credit Services.

Columns

Weather Outlook: Warmer and drier days ahead…

Jeff Andresen | November 30, 2018

Jeff Andresen pngThe development of an upper air trough across central and eastern North America during the last week of October led to northwesterly flow across the Great Lakes region and to an extended period of early winter weather through much of the first half of November.

Field Focus- November 15, 2018

Welcome to the 2018 Field Focus feature. This year, six of our seven reporters are members of ProFile, a leadership development program of Michigan Farm Bureau. In each print edition of Michigan Farm News through the growing season, these young farmers will tell you about conditions on their farms and their regions. 

 

Weather Outlook: Above normal precipitation to continue

Jeff Andresen | November 15, 2018

Jeff Andresen pngSeasonably cool and drier weather developed across the Great Lakes region during late October, allowing a resumption and/or acceleration of fall harvest and fieldwork activities across Michigan. With a persistent troughing pattern in place during much of the latter half of October, temperatures fell to below normal values, slowing grain dry down and soil evaporation rates.


Drier days ahead for harvest?

Jeff Andresen | October 30, 2018

Jeff Andresen pngThe jet stream flow across North America changed dramatically during mid-October, with the transition of the highly amplified western troughing/eastern ridging pattern of the past few weeks to a western ridging/ eastern troughing pattern.

Uncovering the Drivers of Profitability on your Farm

As we continue another harvest with low commodity prices, most producers are wondering where to look next to maximize their profitability. In most cases, the low-hanging fruit of expense cutting has been done. Finding those areas where additional gains can be realized requires more insight and evaluation of your business.