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University of Houston-Victoria Small Business Development Center Pat Calhoun - Instructor

FARM LOANS FOR DUMMIES Last year we taught you how to read ‘em, this year will teach you how to build ‘em!. University of Houston-Victoria Small Business Development Center Pat Calhoun - Instructor. OBJECTIVES. to understand the impact of agriculture on the U.S. economy

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University of Houston-Victoria Small Business Development Center Pat Calhoun - Instructor

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  1. FARM LOANS FOR DUMMIES Last year we taught you how to read ‘em, this year will teach you how to build ‘em! University of Houston-Victoria Small Business Development Center Pat Calhoun - Instructor

  2. OBJECTIVES • to understand the impact of agriculture on the U.S. economy • to learn agricultural terminology • to understand cash flow and production cycles • to understand the financial mindset of the average producer • to review benchmark ratios and their calculations • to learn common FSA forms • case study

  3. ECONOMICAL FOOD SUPPLY • It takes about 40 days of income for most Americans to pay their annual food budget • It takes more than 100 days to pay their annual taxes

  4. MOST AFFORDABLE

  5. AMERICAN FARMER IS: • 1997 – 32% age 65+ • 1987 – 20% age 65+ • 1978 – 15% age 65+ • 165,102 farms operated by women • Median age of all women on farms is 53.

  6. U.S. FARM LANDSCAPE • Texas – 227,000 farms • Missouri – 108,000 farms • Iowa – 93,000 farms • Tennessee – 91,000 farms • California and Kentucky – 88,000 farms

  7. U.S. FARM LANDSCAPE con’t. • Individual or family owned – 86% • Family partnership – 9% • Family-owned corporation – 4% • Non-family corporations – 1%

  8. U.S. FARM LANDSCAPE con’t. • Total land in farms was estimated 941.2 million acres in 2001 compared to 1.04 billion acres used for farming in 1980. • More than 24 million workers (17% of total U.S. workforce) produce, process, and sell the nation’s food and fiber.

  9. U.S. FARM LANDSCAPE con’t. Small farms: annual sales < $100K • 84% of all farms • 35% of farm debt • 13% of total farm sales

  10. U.S. FARM LANDSCAPE con’t. Commercial farms: annual sales > $100K • 16% of all farms • 65% of farm debt • 87% of total farm sales

  11. PRODUCTIONToday’s farmer produces enough food and fiber for 129 people.

  12. PRODUCTIONToday’s farmer produces enough food and fiber for 129 people.

  13. ENVIRONMENTAL PROTECTION Erosion rate by water on cropland has been reduced by 32% since 1982.

  14. FOOD DOLLAR Farmers and Ranchers receive only 19¢ out of every dollar that is spent on food. In 1980 farmers received 31¢.

  15. AGRICULTURAL TRADEIn2001Total U.S. Agricultural exports = $53 billionTotal U.S. Agricultural imports = $39 billion

  16. Ethanol 1.77 billion gals. produced in 2001 655 mil. bu. of corn and 33 mil. bu. of grain sorghum used 61 ethanol plants in operation with 50 new plants scheduled to be on line by 2004 Biodiesel From Jan 1999 to Sep 2001, more than 100 major vehicle fleets implemented biodiesel programs. i.e. U.S. Army State of New Jersey Cincinnati city buses Florida Power and Light MORE THAN FOOD

  17. AGRICULTURAL TERMINOLOGY AND PRODUCTION / CASHFLOW CYCLES

  18. AGRICULTURAL DEFINITIONS • Acre - It was in use in England at least as early as the eighth century, and by the end of the ninth century it was generally understood to be the area of a field one furlong (40 rods or 10 chains) long by 4 rods (or 1 chain) wide. Thus an acre is 10 square chains, 160 square rods, 43 560 square feet or 4840 square yards. • Furlong - The word "furlong", from the Old English fuhrlang, means "the length of a furrow"; it represents the distance a team of oxen could plow without needing a rest. A furlong equals 40 rods, which is exactly 10 chains, 220 yards, 660 feet, or 1/8 mile.

  19. AGRICULTURAL DEFINITIONS • Chain - a unit of distance formerly used by surveyors. The traditional British surveyor's chain, also called Gunter's chain because it was introduced by the English mathematician Edmund Gunter (1581-1626) in 1620, is 4 rods long: that's equal to exactly 1/10 furlong, 22 yards, or 66 feet (20.1168 meters). • Rod - a traditional unit of distance equal to 5.5 yards (16 feet 6 inches or exactly 5.0292 meters). The rod and the furlong were the basic distance units used by the Anglo-Saxon residents of England before the Norman Conquest of 1066.

  20. AGRICULTURAL DEFINITIONS • Bushel - a commercial unit of weight for grains and other bulk commodities. Agricultural commodities such as wheat are traditionally sold by the bushel, but because commodities tend to settle and compact in shipping, disputes over the volume delivered arise easily. To avoid these disputes, traders in a market or a country generally agree on a standard weight for one bushel of the commodity. Often this standard weight is set by law. Although the bill of lading still shows "bushels," it is really the weight rather than the volume that is sold and guaranteed. For example, in the United States a bushel of wheat equals 60 pounds (27.216 kg), a bushel of barley 48 pounds (21.772 kg), a bushel of oats 32 pounds (14.515 kg), and a bushel of rye 56 pounds (25.401 kg).

  21. AGRICULTURAL DEFINITIONS • Hundredweight (cwt) - a traditional unit of weight equal to 1/20 ton. The U.S. hundredweight seems to have been invented by merchants around 1840. To distinguish the two hundredweight units, the British version is often called the long hundredweight (112 lbs.) and the American is called the short hundredweight (100 lbs.) • Barrel (bbl) - a commercial unit of weight, varying with the commodity being measured.

  22. AVG. BU. WTS. AND SEEDS / LB.

  23. HYBRID MATURITY Most crops mature enough to harvest in 120 to 180 days. This is not an exact figure, because growth rates are based on “heat units”. For example corn will not grow when the temperature is below 50° F and will not mature any faster once temperatures are higher than 86° F. Once they have accumulated enough heat units, then they are considered mature.

  24. GESTATION PERIODS • Cow – 285 days • Horse – 337 days • Sheep – 148 days • Goat – 151 days • Pig – 113 days

  25. CASHFLOW CONSEQUENCES At best an agricultural producer will only have positive cash flow anywhere from one to three times in a year. Counselor thinking has to adjust to the differences in the timing of cash flows.

  26. FINANCIAL MINDSET OF AGRICULTURAL PRODUCERS

  27. AGRICULTUREdefined today Agriculture has been described as “asset rich and cash poor.” This is an extremely accurate definition. The land has probably been handed down for generations, the equipment costs in the hundreds of thousands of dollars, yet prices have remained relatively static.

  28. PRICE OF COTTON 1950 - 40¢ per lb. 1990 - 67¢ per lb. An increase of 68%. COST OF EQUIPMENT (Tractor, planter, plow) 1950 – $18,000 1990 – $96,400 An increase of 436%. COMPARISONS

  29. AGRICULTUREfinancially defined • Irrational adj. 1.a Not endowed with reason. b. Affected by loss of usual or normal mental clarity. c. Contrary to reason; illogical. • Investor n. 1. A person that commits money or capital in order to gain profit or interest.

  30. 2001-2002 RMACotton and Cash Grains ROE • Cotton Quartiles (SIC # 0131) • 59.8 • 10.5 • (11.1) • Cash Grain Quartiles (SIC # 0115) • 14.8 • 3.8 • (0.6)

  31. 2001-2002 RMABeef Cattle and Hogs ROE • Beef Cattle Quartiles (SIC # 0212) • 16.2 • 5.3 • (2.5) • Hog Quartiles (SIC # 0213) • 66.4 • 27.6 • 14.2

  32. COMMODITY PRICING When preparing a FSA guaranteed loan, the Agency provides commodity pricing for calculating income. If current pricing is needed I use two sources: • ftp://ftp.fsa.usda.gov/public/ratespub/default.htm • http://www.ams.usda.gov/lsg/mncs/ls_amar.htm

  33. BREAK FOR LUNCH REMEMBER, IF YOU EAT, YOU ARE INVOLVED WITH AGRICULTURE!

  34. BENCHMARK RATIOS AND THEIR CALCULATIONS

  35. Farm Financial Standards Task Force • Identify certain ratios common to all areas of the country • Identify standard methods of calculating these ratios • Draw up standardized farm financial statement guidelines that may be used by all farm lenders

  36. LIQUIDITY RATIOS MEASURES ABILITY TO TURN ASSETS INTO CASH: Current Ratio Working Capital

  37. CURRENT RATIO Current Assets Current Liabilities • >150% is strong • <100% is risky

  38. WORKING CAPITAL Current Assets (–)Current Liabilities • Working capital is an absolute number and indicates how much flexibility the producer has in managing the business.

  39. LEVERAGE RATIOS MEASURES THE AMOUNT OF OUTSTANDING DEBT: Debt to Asset Debt to Equity

  40. DEBT TO ASSET Total Debt Total Assets • <30% is very strong • >70% represents high risk

  41. DEBT TO EQUITY Total Debt Total Equity <42% is strong financial position >230% is high risk

  42. PROFITABILITY RATIOS MEASURES EFFECTIVENESS IN TURNING SALES INTO PROFIT: Operating Profit Margin Return on Assets Return on Equity

  43. OPERATING PROFIT MARGIN Net farm income from operations • (+) interest expense • (–) operator management fee • () gross farm revenue • >25% is profitable <10% is high risk

  44. RETURN ON ASSETS(mostly owned) Net farm income from operations (+) interest expense (–) operator management fee () average total farm assets • >5% is profitable • <1% is high risk

  45. RETURN ON ASSETS(mostly leased) Net farm income from operations • (+) interest expense • (–) operator management fee • () average total farm assets • >12% is profitable • <3% is high risk

  46. RETURN ON EQUITY Net farm income from operations (–) operator management fee () average total farm equity • ROE is a dangerous ratio: it can be artificially inflated by low equity!

  47. EFFICIENCY RATIOS MEASURES PRODUCTIVITY OF YOUR BUSINESS ASSETS: Operating Expense ratio Interest Expense ratio Depreciation Expense

  48. OPERATING EXPENSE RATIO(mostly owned) Total farm expense • (+) interest expense • (+) depreciation • () gross farm revenues • <65% is very efficient • >80% is high risk

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