Farm406

FARM 406 12 • e cows can't come home until you find them one. Ag lending is more than just loans; it's understanding your way of life. We get it, because we live it. Ag lending—it's you and together. Find out more at firstinterstate.com Name: Montana -- Farm 406 Size: 3.29 x 9.17 Color: Full the working capital ratio. This ratio can be thought of as a barometer of an operation's ability to meet short-term finan- cial obligations: higher ratios typically characterize efficient operations that are more likely to withstand market volatility, while operations with lower ratios are more vulnerable. Typ- ically, operations with working capital ratios below 20% are considered to be particularly vulnerable, those between 20 and 50% are stable, and those above 50% are strong. Data for Montana producers in 2014 (the most recently available year) indicate that 42% of producers had a work- ing capital ratio below 20%, the threshold for being consid- ered particularly vulnerable. Perhaps more alarming is that approximately 33% of producers had a working capital ratio below 10%, making them even more exposed to short-term market volatilities. Conversely, 51% of Montana producers were characterized as having financially strong operations with working capital ratios above 50%. It is important to note that commodity market prices deteriorated faster than farm expenses during the last two years, implying that in 2017, it is likely that the working capital ratio for many operations has decreased. So what can producers do to reduce their vulnerability to financial downturns and overall market uncertainty? A glance at the working capital ratio would suggest several options: reduce or transfer short-term debt to medium- or long-term debt, sell assets to generate cash flow, increase income, and/ or reduce expenses. Refinancing short-term debt could be a viable and effective option for many operations. For U.S. wheat farmers, the average debt-to-asset ratio (a longer-term financial solvency measure) is between 13 and 15%, down from approximately 25% observed during the mid-1990s. While transferring shorter-term debt to longer-term debt would increase an operations debt-to-asset ratio, U.S. farms' current relatively low debt-to-asset ratios suggest that there is sufficient capacity for refinancing. Selling assets could be another quick way to generate cash and maintain financial sustainability, but doing so requires a careful assessment of trade-offs. FIRST, if an asset has been fully depreciated, an operation could face a high tax payment on the generated revenues from the asset's sale, making the sale potentially much less beneficial than initially thought. SECOND, it is important to compare the short- term cash flow from an asset's sale with the medium- and long-term implications of not being able to use that asset to generate future income. Therefore, it is critical to maintain an objective forward-looking perspective when assessing the trade-offs of short-term cash flow from asset sales with lon-

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