Business Growth Strategies
of Illinois Grain Farms
Cesar L. Escalante and Peter J. Barry

Abstract                     ...
70 Business Growth Strategies of Illinois Grain Farms

grain farms that highly specialize in corn,                   Boes...
Agricultural Finance Review, Spring 2002                                Escalante and Barry 71

(D/E ), respectively, and...
72 Business Growth Strategies of Illinois Grain Farms

FBFM maintains accrual accounting                 Though the asset...
Agricultural Finance Review, Spring 2002                           Escalante and Barry 73

stimulated by prudent decision...
74 Business Growth Strategies of Illinois Grain Farms

Potentially, a farm could grow in spite of        Descriptive Rela...
Agricultural Finance Review, Spring 2002                                                 Escalante and Barry 75

 Table 1...
76 Business Growth Strategies of Illinois Grain Farms

                       90,000                                     ...
Agricultural Finance Review, Spring 2002                             Escalante and Barry 77

 Table 2. OLS Regression Res...
78 Business Growth Strategies of Illinois Grain Farms

Agricultural Finance Review, Spring 2002                            Escalante and Barry 79

Boessen, C. R., A. M. Feather...
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Business Growth Strategies of Illinois Grain Farms

  1. 1. Business Growth Strategies of Illinois Grain Farms Cesar L. Escalante and Peter J. Barry Abstract The continuance of the agricultural business cycle during the last few years This study identifies key strategies of the 20th century was reflected in employed by Illinois grain farms to prevent highly volatile farm incomes. This the erosion of their equity positions due to coincides with the enactment of significant downturns in commodity prices government legislation that redefined the during the implementation of the 1996 role of federal policy toward the U.S. farm bill. The econometric results agricultural sector. emphasize the collective importance of revenue enhancement, cost reduction, and The repercussions of the “freedom to capital management strategies. Nonfarm- farm” attribute of the 1996 farm bill [the related strategies aimed at minimizing Federal Agriculture Improvement and equity withdrawals through regulated Reform (FAIR) Act] interrupted a period family living expenditures, as well as of strong farm income that started in the supplementing low farm incomes with early 1990s. Thus, high production and receipts from nonfarm employment and large carryover stocks resulted in investments, significantly affect cost value significant downturns in prices of many equity growth rates. Moreover, significant commodities during the early years of the financial and asset management strategies farm bill’s implementation. include those that minimize the costs of borrowing and maintain high asset In 1998, the federal government, in an productivity levels through elimination of effort to stabilize farm incomes, disbursed excess farm capacity. a total of $12.2 billion in payments to farmers, representing a 62.89% increase Key words: backward elimination over the previous year’s level of $7.5 billion procedure, capital management, cost value [U.S. Department of Agriculture/Economic equity growth rate, operations management, Research Service (USDA/ERS)]. As a unrealized nominal capital gains result, the 1996 farm bill’s original intent of replacing deficiency payments with decoupled production and price supports under declining fiscal budget outlays was undermined. In the predominantly crop-producing regions such as Illinois, incremental federal support had been larger than the national average, with total payments growing by 68.95% and 83.34% in 1998 Cesar L. Escalante is an assistant professor in the and 1999, respectively (USDA/ERS). Department of Agricultural and Applied Economics, University of Georgia; Peter J. Barry is a professor and director of the Center for Farm and Rural Business In spite of the influx of government Finance, Department of Agricultural and Consumer support, farm income variability still Economics, University of Illinois at Urbana-Champaign. remained relatively high, especially for
  2. 2. 70 Business Growth Strategies of Illinois Grain Farms grain farms that highly specialize in corn, Boessen, Featherstone, Langemeier, and soybean, and wheat production.1 Under Burton distinguished successful from these conditions, the pressure for the farm unsuccessful farms based on real average business to grow has created a difficult return on equity. Mean and variance challenge for farmers. measures of return on equity were employed by Purdy, Langemeier, and Successful farm business performance is Featherstone to determine the impact of evidenced by significant growth over time risk and specialization on the farm’s mean in a farm’s equity capital. Such growth financial performance. directly reflects the accumulation of wealth, enhancement of solvency In this study, farm-level data are used to positions, expanded credit capacity, and examine important factors associated with strengthening of future income-generating the growth of estimated cost value equity capacity. Farm business growth then capital for a panel of Illinois crop farms could still be achieved even during periods during the period 1996 S1999. We analyze of increasing income risk when the farm’s estimates of the realized equity growth income potential is low. rate, which is considered to be a more comprehensive measure of business Growth strategies under these conditions growth than previous growth indicators might include (among others) maintaining introduced in the past. high levels of operating efficiency, low withdrawals for family consumption and Moreover, the empirical framework taxation, and unrealized capital gains on consolidates many of the growth farm assets, particularly land, that may, determinants separately identified in in turn, reflect expectations of continued, previous empirical works. We identify key future growth in nominal earnings by strategies employed by the sample farms these assets. The farm’s financial leverage in shielding their farm equity positions position might also influence growth from strong downward pressures caused through the dual effects of more rapid by significant downturns in farm incomes equity growth, accompanied by greater during the first few years of the farm bill’s financial risk of loss. implementation. Farm equity growth rates may be significantly influenced by the Previous studies of differences in farm implementation of either operational or business performance have mostly capital management strategies, or both as concentrated on other indicators, calculated complements to each other. over multiple periods, as in the case of growth in net income per acre or per dollar In the following sections, we provide a of equity capital. For example, Plumley and discussion of the study’s conceptual base, Hornbaker categorized farms according to describe the financial attributes of the their varying financial performance levels farm database, and report the results of using four performance measures: net the econometric analysis. farm income and management returns, each measured for every tillable acre and dollar of farm equity. Conceptual Discussion The relationship between a farm’s expected G 1 Based on the annual summaries of financial rate of growth (g ) of equity capital and its characteristics of Illinois farms, the relative variability (calculated as the coefficient of variation) of farm key financial determinants can be incomes, inclusive of government payments, for grain expressed as a weighted average of the farms increased from 0.1644 (1994S1996) to 0.4713 difference between the expected rate of (1997S1999) comparing two three-year periods around G return on assets (r ) and the cost of debt the time of the 1996 farm bill enactment (Ellinger, Escalante, Barry, and Raab, 1999, 2000; Miller, (i ), where the weights are the ratios of Ellinger, and Barry, 1994, 1995). assets to equity (A/E ) and debt to equity
  3. 3. Agricultural Finance Review, Spring 2002 Escalante and Barry 71 (D/E ), respectively, and the result is net of under the lender-borrower relationship withdrawals for taxation (t ) and family (Nasr, Barry, and Ellinger). Asset consumption (c ) (Barry, Ellinger, Hopkins, management strategies are aimed at and Baker). Those relationships are optimizing the profit-generating capacities expressed as: of the farm’s assets by choosing to retain or purchase certain assets to produce (1) G = [r (A/E ) ! i (D/E )]k, g G higher asset productivity ratios. where k = (1 !t )(1 ! c ) is a net rate of savings. Data Sources and Model Development Equation (1) shows some of the intuitively clear alternatives for influencing the This analysis utilizes a panel data set of expected rate of growth of equity capital. grain farmers who were continuous That is, the equity growth rate will participants in the Illinois Farm Business increase as the rate of return on assets is Farm Management (FBFM) system during higher, and the rates of interest, taxation, the first four years of the last farm bill’s and consumption are lower, and those implementation, 1996 S1999. The data set effects grow stronger as financial leverage was used to identify the key strategies increases. implemented by grain farmers2 to optimize net worth growth rates by minimizing the These growth strategies may be classified risk of erosion of farm equity levels as farm under two major categories: operational incomes became more volatile due and capital management (AgriSolutions, to cyclical market conditions and federal Inc.). Operational strategies may be policy adjustments during the latter half directed at optimizing the rate of return of the 1990s. on assets through either revenue enhancement or cost reduction, or both. The farm record services offered by FBFM The farm enterprise could expand its have a long history; however, rigorous options for revenue generation through, for certification by field staff of the example, effective marketing strategies and completeness of the farmer’s financial diversification into alternative enterprises data was only initiated in 1985. While that entail either lower risk or higher the number of farmers who maintained return, or both. Incremental income certified balance sheets had grown to supplementing farm-related profits can about 2,000 in 1999 (from about 7,000 also be provided by nonfarm sources, such FBFM members annually), the number as off-farm employment and financial sustaining certification over time is much investments. smaller. For the 1996 S1999 time span, 52 Illinois grain farms received continuous Cost-reduction strategies primarily entail certification of usable financial and family improvements in operating efficiencies. living records.3 Cost control outside the farm business requires the regulation of levels of nonfarm expenses (such as family withdrawals). 2 The Illinois FBFM system defines grain farms as those where the value of the feed fed was less than 40% On the other hand, capital management of the crop returns and where the value of feed fed to dairy or poultry was not more than one-sixth of the solutions entail debt and asset crop returns (Ellinger et al., 2000). management strategies. Financial 3 This group of farmers who continuously maintained management strategies may involve the acceptable farm records might be more diligent, regulation of debt (D/E ) and borrowing conscientious, and hence better farm managers. However, it remains to be empirically validated whether costs (i ) to levels that minimize the or not farm management skills could be strongly resulting financial stress which could arise related to consistent certification under the FBFM from the negative effects of agency costs system.
  4. 4. 72 Business Growth Strategies of Illinois Grain Farms FBFM maintains accrual accounting Though the asset and equity estimates information for farmers. Under its fair obtained from this adjustment procedure market value asset valuation, farmland may not precisely reflect accurate cost is valued at current market levels with values, it is believed this methodology annual adjustments reflecting changes in best generates estimates of growth rates price indexes for Illinois farmland reported of cost value equity which reduce (if not by the USDA’s Economic Research Service. completely eliminate) the influence of In addition, realized capital gains and unrealized capital gains from farmland losses on liquidated and depreciable assets valuation. are measured and utilized in determining net farm income, consistent with the Ten variables, grouped into four categories recommendations of the Farm Financial (introduced and discussed below), are Standards Council. identified as possible determinants of equity growth. The first two categories Annual changes in a farm’s equity capital represent capital management strategies thus reflect the effects of retained reflected by proxy variables for asset and earnings, realized capital gains on non- financial management. The last two real estate assets, and unrealized nominal categories consider strategies designed to capital gains on farmland owned by the enhance revenues and reduce costs. In farm business. the absence of specific information on every possible individual strategy, certain Growth rates of the farm’s realized equity proxy measures have been used to capital can only be determined by collectively represent a set of related eliminating the contributions from growth strategies. unrealized nominal capital gains attributed to farmland valuation. Given the difficulty in tracing back the original purchase Asset Management values of most farmland owned by FBFM member farms (such as inherited The asset turnover ratio (ATO), calculated properties originally acquired in the by dividing the value of farm production by 1800s), this study utilizes “estimates” of the adjusted value of total farm assets, is cost value equity growth rates derived an asset productivity measure indicating from a reconstruction of farmland, and whether or not the utilization of the farm’s total asset and equity values determined asset complement translates to favorable under the FBFM fair market valuation high returns for the farm enterprise. procedure. Lower ratios could suggest the existence of idle resource capacity or redundant assets The procedure starts with ending net that do not have much productive value to worth and land values in 1995. The farm the farm business. This variable is a balance sheets in the subsequent years collective proxy measure for a farmer’s are then adjusted by holding the initial possible asset investment, purchase, and land valuation in 1995 constant as it is sale decisions designed either to improve carried from year to year. In the absence the farm assets’ productive capacities or of exact land acquisition data from the eliminate excess capacity. individual farms, increases in land holdings in any particular year are priced Growth-enhancing decisions may involve at the prevailing market value for that the liquidation of nonproductive assets year. The value of any incremental rarely used in farm production, such as acreage determined at the year of idle farmland and obsolete farm equipment purchase is again held constant in each of in excess of their economic values. These the succeeding years. Each farm’s total assets often have higher maintenance asset and equity positions are then costs relative to the revenues they subsequently adjusted. generate. Business growth may be further
  5. 5. Agricultural Finance Review, Spring 2002 Escalante and Barry 73 stimulated by prudent decisions to acquire structure decisions on equity growth is necessary replacements for these represented by the farm’s debt-to-asset liquidated assets, such as essential and ratio (LEV ) calculated using the modified highly productive farm machinery, to total asset values derived in this study. attain significant improvements in the profitability of the farm business. An additional leverage-related measure, the ratio of interest expense to gross The tenure ratio (TEN ) is calculated as revenues (INTRAT ), is also considered as the ratio of the farmer’s investment in a collective proxy measure for a set of farmland to the value of total acres strategies designed to minimize the cost operated including both leased and owned of borrowing. While the farm’s leverage acreage. Greater reliance on leasing is position determines the magnitude of expected to increase the rate of growth of borrowing expenses, and the farmer’s equity, as shown by previous studies, lenders have the prerogative to determine although capital gains on farmland are borrowing rates, several opportunities to foregone when the farmer decides to rent reduce these predetermined borrowing land (Ellinger and Barry; Purdy, costs are available to the farmer. Langemeier, and Featherstone). Loan refinancing strategies during Two additional ratios are included to periods of declining borrowing rates capture the farm’s preference among the could translate to extra savings for the cash (CASHRAT ) and share (SHARAT ) farm business. These refinancing leasing options in the farmer’s attempt to strategies could entail shifts from one gain control of more farmland to expand payment scheme to another (such as the size of farm production. On average, fixed to adjustable mortgage rates) to cash leasing is believed to generate higher realize net savings in loan amortization expected returns (before debt service) than payments. Prompt and responsible loan share leasing; the latter scheme, however, repayment practices may also help farm has more favorable risk-bearing attributes borrowers avoid incurring unnecessary and liquidity structure, thus minimizing loan penalties and surcharges that could the need for short-term operating credit potentially further deplete profits and (Escalante and Barry). A particular farm’s savings. leasing strategy to maximize the annual equity growth therefore depends on the Revenue Enhancement farm’s existing financial strength to tolerate temporary, short-run liquidity A farm’s ratio of net farm income to gross gaps. revenues (NFIRAT ) is considered as a proxy measure for strategies implemented Financial Management to enhance the net contributions of the farm business to increases in farm net Equity growth is also influenced by a worth. During periods of low commodity farm’s financial leverage position. Higher prices and increasing income risk (as debt levels do not necessarily stimulate exemplified by the four-year sample period growth if they translate to serious financial of this study), the farmer may rely on stress. Financially stressed farms often alternative farm revenue enhancement are associated with higher leverage strategies such as existing and ad hoc positions than other well-performing federal income subsidy supports. Effective farms. Successful farms are able to marketing strategies, such as forming manage higher leverage ratios only when marketing alliances and exploring the returns generated from assets nontraditional outlets for the farm consistently exceed the cost of borrowing produce, could also effectively enhance (Boessen et al.). The effect of capital farm revenues.
  6. 6. 74 Business Growth Strategies of Illinois Grain Farms Potentially, a farm could grow in spite of Descriptive Relationships losses incurred from farm operations if incomes from off-farm sources exceed the The farms included in this study are level of family withdrawals and net farm divided into five classes according to the losses. Additional income realized from average of their annual equity growth rates employment and investment activities from 1996 to 1999. Class 1 farms have outside the farm, represented by a zero or negative growth rates, Class 2 measure of net nonfarm income (OFFARM), farms have equity growth rates between enhances business revenue by reducing zero and 5%, Class 3 farms have growth cash withdrawals from the business— rates between 5% and 10%, Class 4 farms especially during periods of low have growth rates between 10% and 15%, profitability and viability of farming and Class 5 farms have growth rates operations. exceeding 15%. Cost Reduction Average values for the 10 financial variables are reported in Table 1 for the In this study, the operating expense ratio respective growth classes. The financing (OPRAT ) will serve as proxy for operating variables, INTRAT and LEV, both form a cost control strategies which may include U-shaped relationship with equity the selection of cost-efficient technologies growth rates, as the lowest and highest and inputs, cost-saving production growth classes are associated with scheduling, and other overhead cost- higher borrowing costs and leverage reduction schemes. OPRAT is calculated ratios. These trends confirm the dual as the ratio of total operating expenses nature of the leverage effect on equity (excluding interest and depreciation) to growth.4 gross revenue. This measure is expected to vary inversely with equity growth, For some farms, greater financial stress consistent with the findings of Purdy, arising from incremental debt may result Langemeier, and Featherstone. Since in greater financial vulnerability and lower values of this measure indicate high slower equity growth. In contrast, levels of efficiency, its coefficient is increasing leverage may promote equity expected to be negative. growth for certain farms able to maintain higher business returns relative to the cost of debt. Data on family living expenses (FAMLIV ) are maintained in the FBFM database for As expected, higher net off-farm income, a smaller group of farms. The effect of as well as lower levels of family living family living expenses is important in expenditures and tenure, tend to be determining the overall growth in farm associated with higher growth equity rates. equity beyond the retained earnings effect. A negative growth in equity is possible Aside from the inverted U-shaped whenever farm withdrawals are larger than relationships observed among values of the aggregate value of net farm and off- the net farm income ratio (NFIRAT ) and farm incomes. the cash leasing ratio (CASHRAT ), the remainder of the variables form ambiguous Family size and lifestyle preferences are relationships with anticipated equity among important determinants of the growth. effect of family living withdrawals on equity growth. Larger families and the propensity to indulge in the amenities of an 4 A note of caution is suggested in analyzing the trends across the different classes. The sample sizes of extravagant lifestyle are detrimental to the classes are relatively small; thus, one or two equity growth, most especially during observations can possibly influence the trends in the periods of low farm profitability. mean values of the variables.
  7. 7. Agricultural Finance Review, Spring 2002 Escalante and Barry 75 Table 1. Mean Values of Financial and Demographic Factors, by Equity Growth Classes: Illinois Grain Farms, 1996 S1999 Equity Growth Classes a Variable Class 1 Class 2 Class 3 Class 4 Class 5 G Equity Growth Rate (%) (g ) !8.49 1.76 8.29 12.77 30.39 Asset Turnover Ratio (ATO ) 0.310 0.350 0.335 0.316 0.657 Tenure Ratio (TEN ) 0.263 0.153 0.155 0.125 0.046 Cash Leasing Ratio (CASHRAT ) 0.213 0.248 0.255 0.385 0.168 Share Leasing Ratio (SHARAT ) 0.525 0.599 0.591 0.490 0.786 Debt-to-Asset Ratio (LEV ) 0.542 0.428 0.299 0.411 0.666 Interest Expense Ratio (INTRAT ) 0.132 0.065 0.033 0.065 0.058 Net Farm Income Ratio (NFIRAT ) 0.110 0.190 0.281 0.202 0.186 Net Off-Farm Income ($) (OFFARM ) 12,474 11,175 16,681 20,474 21,726 Operating Expense Ratio (OPRAT ) 0.748 0.654 0.567 0.696 0.688 Family Living Expenses ($) (FAMLIV ) 48,905 46,346 48,197 45,807 45,889 Number of Farms (n) n = 14 n=8 n = 10 n = 10 n = 10 a Class 1 = zero or negative equity growth rates; Class 2 = equity growth rates between 0% and 5%; Class 3 = equity growth rates between 5% and 10%; Class 4 = equity growth rates between 10% and 15%; and Class 5 = equity growth rates exceeding 15%. Econometric Analysis The econometric procedure entails a backward elimination method under an Figure 1 presents the intertemporal four- ordinary least squares (OLS) regression in year trends of the calculated average farm SAS (SAS Institute, Inc.). This procedure equity and net farm incomes for all sample starts with a general regression procedure farms. The plot shows an overall steady that considers all eligible explanatory growth in average farm equity during the variables. The model undergoes several four-year period. In spite of the sharp iterations as one variable after another, decline in net farm income levels in 1998, identified as the one contributing the least average cost equity levels, even in the to the model’s explanatory power, is absence of unrealized capital gains from dropped from the estimating equation until farmland valuation, have very slightly all remaining variables produce F-statistics declined, decreasing by only a quarter of significant at a specified confidence limit. the drop in average net farm income.5 An analysis of econometric relationships The regression results shown in Table 2 between equity growth rates and various are based on cross-sectional data of four- financial indicators will identify business year average values of the dependent strategies associated with such relatively variable (annual equity growth rates) and smoother trends in farm equity levels the 10 explanatory variables for each cushioned from the sharp fluctuations of sample farm.6 commodity prices and farm revenues. 6 Results of diagnostic tests performed on an estimating model that considers all 10 explanatory 5 The net farm income levels used in this analysis variables indicate the absence of heteroskedasticity. already consider the effect of government payments The same result is obtained when the diagnostic tests received by the farms. Despite these contributions to are performed on the abbreviated version of the model stabilize income (although at a lesser extent under the which includes only the remaining four significant farm bill), farms continued to experience sharp explanatory variables. Multicollinearity is also not a fluctuations in net farm incomes starting in 1998 (see problem since the highest condition index number footnote 1 for the significant rise in relative variability obtained (1.60261) is below the critical value suggested of farm incomes for the period 1997S1999). by Belsley.
  8. 8. 76 Business Growth Strategies of Illinois Grain Farms 90,000 600,000 Farm Equity 80,000 Farm Equity (ending net worth, $) (ending net worth) 500,000 70,000 Net Farm Income ($) 60,000 400,000 50,000 300,000 40,000 30,000 200,000 Net Farm Income 20,000 100,000 10,000 0 0 1996 1997 1998 1999 Figure 1. Farm Equity and Net Farm Income Levels: Illinois Grain Farms, 1996 S1999 These results reductions in indicate that after the backward family living withdrawals. During periods elimination procedure based on a of low farm business viability, a deliberate minimum confidence limit of 95%, four of regulation of equity withdrawals by the original 10 variables—FAMLIV, farmers and their families could translate OFFARM, ATO, and INTRAT—can into higher equity growth rates. This collectively define an estimating equation strategy indicates a conscious decision by which can significantly account for farmers to adjust family lifestyle variations in the farm’s equity growth preferences and adopt more rates. affordable, reasonable expenditure patterns. Notably, each component of operations The remaining two variables are asset and and financial/capital management is financial management strategies represented represented by the four significant by ATO and INTRAT, respectively. ATO, an variables. Two of the variables are asset productivity measure, is positively revenue-enhancement and cost-reduction signed, thus suggesting that farms with strategies. Given the unsatisfactory levels less idle or unproductive assets are more of market prices faced by these farms likely to grow faster. A complement of during the sample period that negatively highly productive assets may be the result influenced gross farm revenues, the farms of asset liquidation and replacement relied on another viable revenue- decisions designed to eliminate excess enhancement alternative offered by farm capacity attributed to nonessential, nonfarm income sources (OFFARM ) among nonproductive assets such as idle farmland employment and investment alternatives and rarely used, obsolete farm machinery. outside the farm. The coefficient of INTRAT, on the other The other solution requires a cost- hand, is negative, indicating effective reduction scheme involving the regulation reductions in borrowing costs could of the level of withdrawals for family living significantly enhance equity growth. The expenditures. The coefficient sign of the insignificance of the debt-to-asset ratio FAMLIV variable confirms the significant negative effect on equity growth of
  9. 9. Agricultural Finance Review, Spring 2002 Escalante and Barry 77 Table 2. OLS Regression Results for Remaining Significant Variables Under Backward Elimination Procedure: Illinois Grain Farms, Cross-Sectional Values for 1996 S1999 Variable Coefficient Prob > |T | Intercept 0.028667 0.5533 Family Living Expenses (FAMLIV ) !0.000002163 0.0084 Net Off-Farm Income (OFFARM ) 0.000003328 0.0009 Asset Turnover Ratio (ATO) 0.431907 0.0001 Interest Expense Ratio (INTRAT ) !0.929349 0.0005 Model R 2 = 0.6368, Prob > F = 0.0001 may imply existing debt levels of the full strategies identified in separate empirical sample of farms are neither significantly analyses. The results emphasize the detrimental nor beneficial to equity growth, complementarity of operational and capital although the descriptive data reported in management strategies for farms in Table 1 reveal potentially diverse effects of general. leverage on high versus low growth rate producers. Rather, strategies to minimize Through this study’s farm-level database, borrowing expenses, perhaps through relationships between a farm’s changes in refinancing strategies and avoidance of equity capital over time and important incidental loan fees, fines, and surcharges, determining factors were analyzed to have more significant effects in enhancing identify specific revenue enhancement, equity growth rates. cost reduction, asset control, and financial management strategies of a sample of Figure 2 compares the trends in two of the Illinois grain farmers. This analysis traces four significant variables with the trend of the transition of a group of farms through net worth growth rates. Except in 1997, the highly volatile conditions of the years the trends in asset turnover ratio (ATO ) immediately after the enactment of the values mirror those observed in equity 1996 farm bill. By deriving estimates of growth rates, thus confirming a relatively cost value equity and assets, our findings strong positive relationship between these provide important insights on specific farm variables. Interest expense ratio (INTRAT ) decisions made during such a time frame values also form a slightly negative in order to avoid excessive erosion of the relationship with net worth growth rates, farm’s equity position under worsening although the relationship is not as strong market conditions. as in the ATO case. The use of estimated cost value equity and assets presents an opportunity to discern Concluding Notes equity growth strategies employed by the farmers, with the exclusion of expected The profile of this study’s sample of grain contributions from unrealized nominal farms mirrors the financial conditions of capital gains on farmland valuation to the the farming community. Given their farm’s net worth position. highly specialized crop production, Illinois grain farms aptly fit our model for The results of this analysis demonstrate analyzing equity growth rates in the light the importance of operational and capital of recent commodity price downturns. The management strategies in achieving high study’s empirical design consolidates into levels of equity growth. As farm operations a common framework various growth became less profitable, farms resorted to
  10. 10. 78 Business Growth Strategies of Illinois Grain Farms 0.5 Asset Turnover Ratio (ATO ) 0.4 0.3 Growth Rates/Ratios 0.2 Net Worth Growth Rate 0.1 Interest Expense Ratio (INTRAT ) 0.0 1996 1997 1998 1999 -0.1 -0.2 Figure 2. Trends in Net Worth Growth and the Key Financial Variables (ATO and INTRAT ): Illinois Grain Farms, 1996 S1999 nonfarm-related strategies aimed at the Based on the results of this study, the enhancement of business revenues and regulation of interest expense through cost reduction. Income sources among refinancing strategies and responsible employment and investment alternatives loan repayment is a more relevant and outside the farm business supplemented significant strategy than making low farm income levels during the four- adjustments in debt levels. year study period. Moreover, the regulation of family living withdrawals, Future research could validate the possibly through adjustments in lifestyle contributions of these factors under more choices and family expenditure patterns, variable and more heterogeneous farm prevented the potential erosion of farm structure conditions than those equity during a period of low and riskier characterized by the Illinois grain farms farm income conditions. comprising this study. In the area of capital management, increases in asset productivity—possibly References attained through a number of asset liquidation, replacement, and purchase AgriSolutions, Inc. Taking Control of Your strategies to eliminate the farm’s excess Farm Business: Producer Education capacity—significantly affected equity Program, Version 2. Brighton, IL: growth rates. The trends in asset AgriSolutions, Inc., January 2001. productivity levels (Figure 2), dropping only slightly in periods where sharp Barry, P. J., P. N. Ellinger, J. C. Hopkins, declines in profitability are observed and C. B. Baker. Financial Management (Figure 1), indicate effective farm asset in Agriculture, 6th ed. Danville, IL: portfolio decisions were made by farmers. Interstate Publishers, 2000. Important financial management strategies Belsley, D. A. Conditioning Diagnostics: that minimize borrowing costs also Collinearity and Weak Data in Regression. significantly influence equity growth rates. New York: John Wiley and Sons, 1991.
  11. 11. Agricultural Finance Review, Spring 2002 Escalante and Barry 79 Boessen, C. R., A. M. Featherstone, L. N. Business Finance, Dept. of Agr. and Langemeier, and R. O. Burton, Jr. Consumer Econ., University of Illinois, “Financial Performance of Successful November 1994. and Unsuccessful Farms.” J. Amer. Soc. of Farm Managers and Rural Appraisers ———. “Financial Characteristics of Illinois 54(April 1990):6S15. Farms: 1993S1994.” Pub. No. 95-F-2, The Center for Farm and Rural Business Ellinger, P. N., and P. J. Barry. “The Finance, Dept. of Agr. and Consumer Effects of Tenure Position on Farm Econ., University of Illinois, August Profitability and Solvency: An Application 1995. to Illinois Farms.” Agr. Fin. Rev. 47(1987):106S18. Nasr, R., P. J. Barry, and P. N. Ellinger. “Financial Structure and Efficiency of Ellinger, P. N., C. L. Escalante, P. J. Barry, Grain Farms.” Agr. Fin. Rev. 58(1998): and D. Raab. “Financial Characteristics 33S48. of Illinois Farms: 1996S1997.” Pub. No. 99-F-3, The Center for Farm and Rural Plumley, G. O., and R. H. Hornbaker. Business Finance, Dept. of Agr. and “Financial Management Characteristics Consumer Econ., University of Illinois, of Successful Farm Firms.” Agr. Fin. June 1999. Rev. 51(1991):9S20. ———. “Financial Characteristics of Purdy, B. M., M. R. Langemeier, and A. M. Illinois Farms: 1998S1999.” Pub. No. Featherstone. “Financial Performance, 00-F-2, The Center for Farm and Rural Risk, and Specialization.” J. Agr. and Business Finance, Dept. of Agr. and Appl. Econ. 29,1(July 1997):149S61. Consumer Econ., University of Illinois, November 2000. SAS Institute, Inc. SAS/ETS User’s Guide, Version 6, 2nd ed. Cary, NC: SAS Escalante, C. L., and P. J. Barry. “Risk Institute, Inc., 1993. Balancing in an Integrated Farm Risk Management Plan.” J. Agr. and Appl. U.S. Department of Agriculture, Economic Econ. 33,3(December 2001):413S29. Research Service. Various data, farm income and government payments. Miller, L. H., P. N. Ellinger, and P. J. Various years, 1995S1999. USDA/ERS, Barry. “Financial Characteristics of Washington, DC. Online. Available at Illinois Farms: 1992S1993.” Pub. No. 94-F-6, The Center for Farm and Rural farmincome/govpayst.asp.