Structure and Finances of U.S. Farms: Family Farm Report ... - AgWeb

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Defining the Financial MeasuresSome of the financial measures used in table 9 are discussed below. The discussion focuses on the moreinvolved financial ratios and show how they are calculated in the Agricultural Resource Management Survey(ARMS).Rate of return on assets. The ratio of net farm income to the assets of the farm. This ratio is often viewed as anindex of profitability, with higher values indicating greater profitability. It is calculated as:Rate of return on assets = 100% × (net farm income + interest paid - charge for operator and unpaid labor -charge for management) ÷ total assetsInterest paid is added back into net farm income because it is the cost of borrowing capital and is part of thereturn to assets. In the case of unincorporated farms, a charge for operator and unpaid labor and a charge formanagement are deducted from net farm income to reflect their opportunity cost.Rate of return on equity. The ratio of net farm income to the net worth of the farm. As with the rate of returnon assets, it is viewed as an index of profitability, with higher values indicating greater profitability. It is calculatedas:Return on equity = 100% × (net farm income - charge for operator and unpaid labor - charge for management) ÷net worthInterest paid is not added back into net farm income in this case because the returns to the assets that are ownedby the farm are of concern, not those financed through borrowing.Operating profit margin. A measure of profitability: returns per dollar of gross farm income (or gross revenue).The operating profit margin measures the funds available to finance the farm business’s capital, after accountingfor the unpaid labor and management contributed by farm operators and their families. It is calculated as:Operating profit margin = 100% × (net farm income + interest paid - charges for operator and unpaid labor -charge for management) ÷ gross farm incomeOperating expense ratio. The ratio of cash operating expenses to gross cash farm income. If the ratio is greaterthan 100 percent, cash income does not cover cash expenses. It is calculated as:Operating expense ratio = 100% × total cash operating expenses ÷ gross cash farm incomeDebt/Asset ratio. Ratio of the farm’s total debt to total assets, showing the share of assets owed to creditors. Itis a measure of the risk exposure of the farm business, with a higher ratio corresponding to greater risk.Debt/asset ratio = 100% × total debt ÷ total assetsFinancial position. Measure of the overall financial position of farms based on their combined net income andsolvency status:· Favorable: positive net farm income and debt/asset ratio no more than 40 percent.· Marginal-income: negative net farm income and debt/asset ratio no more than 40 percent· Marginal-solvency: positive net farm income and debt/asset ratio greater than 40 percent.· Vulnerable: negative net farm income and debt/asset ratio greater than 40 percent.For more information about farm financial measures, see Financial Guidelines for Agricultural Producers (FarmFinancial Standards Council, 2008).28Structure and Finances of U.S. Farms: Family Farm Report, 2010 Edition / EIB-66Economic Research Service/USDA
Overall, net farm income averaged $35,100 in 2007, or 46 percent higherthan in 2006. Sixty-three percent of all farms earned positive net farmincome in 2007, and these profitable farms accounted for the bulk of agriculturalactivity. They generated 81 percent of the total value of production andoperated 70 percent of the land in farms.Selected Financial RatiosResidential/lifestyle farms had an operating expense ratio of 126 percent—on average—in 2007, which means that cash operating expenses exceededgross cash farm income by 26 percent. Cash expenses also exceeded grosscash income for low-sales farms, but the ratio was lower, at 105 percent, nearthe 100-percent breakeven point. Retirement farms covered their expenses,with a ratio of 92 percent. The remaining farm types also generated enoughincome to cover expenses, on average, with their operating expense ratiosfalling in a fairly narrow range, from 71 to 77 percent.The low debt/asset ratio for retirement farms—2 percent—reflects low debtlevels rather than high asset levels. At the other extreme, the ratio for verylarge family farms is 16 percent, or double the rate for all U.S. farms. As aresult of their high debt/asset ratio, very large farms are most likely to beconsidered marginally solvent (positive net farm income, but with a debt/asset ratio above 40 percent).Most U.S. farms have a favorable financial position, which means theygenerate positive returns and have a debt/asset ratio no more than 40 percent.Sixty-one percent of U.S. farms and at least 53 percent of each farm typewere classified as such in 2007. Vulnerable farms—with negative net incomeand a debt/asset ratio above 40 percent—are rare in all farm types, andamount to 3 percent of all farms. Residential/lifestyle farms make up 71percent of the vulnerable group, but their operators are unlikely to depend onthe farm for their livelihood.29Structure and Finances of U.S. Farms: Family Farm Report, 2010 Edition / EIB-66Economic Research Service/USDA
Page 1 and 2: United StatesDepartment ofAgricultu
Page 3 and 4: United StatesDepartmentof Agricultu
Page 5 and 6: References. . . . . . . . . . . . .
Page 7 and 8: Distribution of farms, total produc
Page 9 and 10: IntroductionThe Family Farm Report,
Page 11 and 12: As in previous issues, the Agricult
Page 13 and 14: came from technological change, suc
Page 15 and 16: percent of the farms in both groups
Page 17 and 18: “point system” assigns values f
Page 19 and 20: Full economic costs of milk product
Page 21 and 22: Cow-calf enterprises offer three ad
Page 23 and 24: Location of U.S. Farms and Producti
Page 25 and 26: Table 4Farms and production by reso
Page 27 and 28: majority of farms in the region, 65
Page 29 and 30: Farm Operators, Principal and Secon
Page 32 and 33: farms. Since these farmers produce
Page 34 and 35: Farm Income and Financial Performan
Page 38 and 39: Operator Household Income and Net W
Page 40 and 41: of operator household net worth, re
Page 42: About three-fourths of medium-sales
Page 45 and 46: ContractingContracts can potentiall
Page 47 and 48: Types of ContractsA contract is a l
Page 49 and 50: per year rather than below the pove
Page 52: general—are overwhelmingly male.
Page 55 and 56: Farming in Metropolitan AreasFarmin
Page 57 and 58: Figure 15Mean operator household in
Page 59 and 60: into the Twenty-first Century. Marv
Page 61 and 62: U.S. Department of Agriculture, Nat
Page 64 and 65: In fact, the number of farms in eac
Page 66 and 67: (version 3). Respondents provide wh
Page 68 and 69: iefing room. Both sets of estimates
Page 70 and 71: • Farm operators forget minor or
Page 72: ecause the sector accounts extend b

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