Farm Working Capital Tumbles

The USDA’s latest estimate of U.S. net farm incomes – which we broke down here – also updated measures of farm financial conditions. From the balance sheet, a concerning trend is the tumbling working capital across the farm sector.

Working capital

Working capital is the difference between a farm’s current assets and current liability and serves as a financial shock absorber to help operations navigate income or production shocks. Figure 1 shows inflation-adjusted dollars of working capital across all U.S. farms. The first observation – and something we’ve been concerned about for a while – is that dollars of working capital haven’t returned to 2010-2012 levels despite record incomes.

In 2021, working capital reached $143b, a far cry from more than $200b recorded a decade earlier. For 2024, only $101.7b of working capital is expected, an 18% decline from 2023 and a 30% decline from 2021.

Historically, there was only $82b in working capital in 2015, when producers navigated the earlier margin squeeze. Unfortunately, these data don’t go further back, so measures of conditions in the 1980s, 1990s, or early 2000s aren’t available.

Figure 1. Real U.S. Farm Sector Working Capital, 2009 -2024. Data Source: USDA ERS.

 

Working capital ratio

While total dollars of working capital are often easier to measure, the working capital to gross revenue ratio is more informative. By comparing dollars of working capital to farm revenue, the ratio minimizes any noise created by changes in commodity prices.

Figure 2 plots the working capital ratio for the farm sector. Again, levels have not returned to 2010-2012 highs when the ratio averaged 37%. Recently, the ratio peaked at 25% in 2021 and was 21% in 2021 and 2022.

For 2024, the ratio is forecasted to tumble to 18%. Between 2016 and 2019, working capital levels were just 16% of farm revenue. The downturn in working capital isn’t surprising, but the subdued gains, the rapid contraction, and overall low levels are, especially since farm incomes have remained above long-run average conditions.

Figure 2. U.S. Farm Sector Working Capital to Gross Revenue Ratio, 2009 -2024. Data Source: USDA ERS.

 

Wrapping it up

We often associate working capital burns with tight financial margins and managers tapping into the balance sheet to meet obligations. It’s unclear why working capital was slow to increase and quick to fall, but income isn’t the only driver of working capital changes. For example, producers could use current assets (cash) to purchase intermediate (equipment, livestock) and long-term (farmland) assets. When that occurs, the assets are retained in the business but are now less liquid. Selling equipment, livestock, or land to cover current liabilities isn’t an easy decision and could create additional challenges.

Looking ahead, limited working capital could pose a challenge if income fell sharply.