Financial stress testing for farms

By Matt Reese and Dale Minyo

It is no secret that there are some economic concerns right now for many in the agricultural sector, and it may be a good time for farms to assess how they are positioned to withstand potential challenges ahead.

“The recent USDA report of net farm profits going down 27% definitely pushes us to consider stress testing,” said Brock Burcham, regional vice president of ag lending for Farm Credit Mid America (FCMA). “Stress testing is a way that you can model how extreme or unfavorable circumstances in the marketplace will impact a specific operation so you can be prepared for what you don’t know and play with the numbers. Three of the numbers that we like to focus on when we’re looking at stress testing are working capital, our interest expense ratio and our net farm income. All of our decisions can impact each of those three numbers and we encourage folks to look at those three to help make their decisions for their next purchase or investment.”

The working capital ratio (current assets – current liabilities) measures short-term financial health of the farm. This number is important to consider when making purchases, paying bills and strategic planning. Many economists recommend working capital levels between 20% to 30% of gross revenue. 

The interest expense ratio (total interest/gross farm revenues) provides insight into the impacts of the cost of interest on a farm’s profitability. A ratio over 13% is considered high risk and ratios below 10% are considered low risk.

Net farm income (gross revenue – total expenses) is important for assessing the overall financial viability of the farm operation. This number needs to be enough to cover family expenses, debts and income taxes.

With these three key ratios identified, farmers can take the next step in stress testing their farm financials to evaluate business resilience and plan for future purchases or investments. General financial uncertainty, major purchases or bringing on new employees or another generation on the farm are all situations that may warrant a farm financial stress test.

“Wanting someone to come back to the farm is different than being able to come back to the farm. Those with this goal in mind may need to look at growth or diversifying their revenue to help support that individual and eventually possibly that individual and their family. You’ll need to know how that additional expense of that additional person to the farm looks for the overall operation,” Burcham said. “We’re focused heavily on data with this. There’s always data in good times and bad times, so it’s good to look at that and it’s good to accurately capture that data. We really encourage folks to have a good record keeping system so they can compile actual numbers to what their farm is producing and costing so they’re able to make their best decisions moving forward.”

Stress testing is one of many decision-making FCMA methods. In addition, customers have access to their proprietary Farm Credit Factors Tool and their Monthly Cash Flow and Breakeven Analysis tool that support customers in making informed, data-driven decision.

“The devil could be in the details and we focus heavily on breakeven. I’d encourage everyone to use our Breakeven Analysis Tool. Because although we’re all chasing for the highest dollar in the market, we might learn that we could really lock in some profits even when we’re not catching that high,” Burcham said.

For more information on financial farm stress testing and other financial tools for farms, visit

fcma.com/community/insights/stress-testing-your-farm-financials or contact the local Farm Credit Mid-America office.

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