Dr. Michael Langemeier, Associate Director, Center for Commercial Agriculture and Professor at Purdue University published an article, “Deterioration of Working Capital” that brings together the financial measurements and importance of working capital. Dr. Langemeier writes, “…working capital to total expense ratios above 0.35 are commonly used thresholds by financial analysts and would be considered an adequate level of working capital to weather a one- or two-year downturn. When the working capital ratios fall below 0.20, a farm may have trouble repaying loans.”
Working Capital – USDA ERS
The USDA published the latest projection for farm working capital on February 5th of this year for farms and ranches in the United States. The following graph captures the result in working capital ratios since 2011, forecasting crop years 2019 and 2020.
The downward trend from 2014 is significant. If the 2020F projection is correct, the working capital for America’s farmers and ranchers will have been reduce by more than half in six years. Banks and other financial institutions lending to farmers monitor working capital ratios closely, probably yours. Farmers First Trust’s white paper “Fixing the Balance Sheet” can provide additional information that frees up working capital, here.
Many farmers have accumulated collateralized debt against their farm or ranch land. As farmland prices have risen over time, the ability/opportunity to borrow against the appreciating land value has created increasing debt against the land, sometimes in addition to the borrowed dollars originally used to purchased the land.
Capital Gains Tax
The burden of capital gains tax when farmland is sold reduces the value created on the farmland that has collateralized debt. When the farmland owner needs cash, the value lost to debt plus the cost owed to capital gains tax erases a significant portion of the land value.
If you have decided to sell your farm or ranch land to reduce debt and improve your working capital, MDPT can provide a way to defer the capital gains tax and place those dollars in your pocket so you can keep farming. The deferred capital gains tax will be paid in the future (as many as 30 years later). Contact your CPA and review the white papers, here, that provide examples of how MDPT can make a difference in preserving the value of your farm.
Michael L Gustafson is a Principal with Farmers First Trust.
Farmers First Trust is not associated with Purdue University or Dr. Michael Langemeier.
 March 6, 2020, Purdue University, College of Agriculture