AGEC 465: Agricultural Finance
Farm Management Project
Overview: You, Farmer Brown, are the owner and operator of Cotton Grove Farms. Cotton Grove Farms is a 2,500 acre row-crop operation that primarily raises corn, cotton, soybeans, and wheat. Cotton Grove Farms is an operation that you have built from the ground up. When you first started farming, you did inherit your parent’s farm that consists of 50 acres of tillable land. The farm also has some farm infrastructure such as a few old equipment sheds and a few grain bins that are in working order.
The past few years have been tough for your operation. Due to low commodity prices, you have been hesitant to make many new large equipment purchases or land purchases. However, you have been able to take on additional ground. In 2015, you were able to gain an additional 400 acres after a neighboring farmer retired. You have realized that due to taking on more ground in 2015 that you may need to upgrade your equipment.
In the past, you have always borrowed money from your local bank. They have always been able to meet your credit needs. However, you have begun to realize that their interest rates are not as competitive as other lenders. In fact, after your most recent expansion, Mr. Jeff Shelby, who is an agricultural lender from another bank, has approached you about moving your loans to his bank. Being the astute farm manager that you are, you have recently contacted Mr. Shelby about financing the purchase of a new cotton picker along with moving your other loans.
Mr. Shelby has told you that you will have to submit to him a written business plan and all the necessary financial statements for underwriting purposes.
You will need to submit the following items:
– Business Plan
– Balance Sheet
– Projected Income Statement
– Marketing Plan
Mr. Shelby will review all of the financial information that you have prepared to make the decision as to whether his bank can finance your farming operation.
Part 1: The Balance Sheet (30 points; approximately 2 points per line item on balance sheet)
You will need to download the file “Student Balance Sheet”. You can type the information on the word document titled “Student Balance Sheet” or print off this form, write on the paper copy, and scan it back to your computer. Place the following line items in their proper place:
Line Item Value Line Item Value
Corn – 12,000 bu. $3.40 per bushel Prepaid Expenses $52,000
Soybeans – 2,000 bu. $9.75 per bushel FBT – Farm Truck $14,504
Machinery $425,000 FBT – Land Note $180,679
Bldgs. & Improvement $75,000 Accounts Receivable $25,000
Farm and Home $255,000 FBT – Tractor $32,044
Cash $20,000 Titled Vehicles $50,000
RLOC Balance $225,000 Personal Liabilities $5,517
FBT – Combine $46,442 Personal Assets $52,000
Accrued Interest $40,210 Principal due in 12 months on term debts $32,950
*Hint: You will have a value for Total Farm Assets and Total Farm Liabilities and a value for Total Assets and Total Liabilities. Total Farm Assets and Total Farm Liabilities exclude Personal Assets and Personal Liabilities. Net Worth includes all farm line items and personal line items!
Part 2: The Income Statements (30 points; 10 points per question)
You will need to download the file “AGEC 465 Project Financial Statement Detailed”. You are provided a few details about each year from 2014, 2015, and 2016 to help you understand the trends you are seeing in the Net Farm Income of this operation. You will need to review the income statements for 2014, 2015, and 2016 to answer the questions below. For additional information on the exact figures in these income statements, please review the file “AGEC 465 Project Supplement”. You will need this information to understand the trend in operating expenses. All operating expenses were derived from UT Crop Budgets.
Assumptions for 2014: You crop mix was comprised of 400 acres of corn, 600 acres of full season soybeans, 500 acres of wheat, 500 acres of double crop soybeans, and 600 acres of cotton. Average price per bushel sold equals $4.50 for corn, $11.50 for soybeans, $6.00 for wheat, and $0.77 per lb. for cotton. Operating expenses are from the 2014 UT Extension Crop Budgets. Other operating income and expenses were provided by the instructor. Total acres farmed equaled 2,100 acres. Assumed yields of 130 bushel per acre for corn, 40 bushels per acres for soybeans (both full season and double crop), 60 bushels per acre for wheat, and 900 lbs. of cotton per acre.
Assumptions for 2015: You crop mix was comprised of 800 acres of corn, 900 acres of full season soybeans, 300 acres of wheat, 300 acres of double crop soybeans, and 500 acres of cotton. Average price per bushel sold equals $4.00 for corn, $10.45 for soybeans, $5.80 for wheat, and $0.68 per lb. for cotton. Operating expenses are from the 2015 UT Extension Crop Budgets. Other operating income and expenses were provided by the instructor. Total acres farmed equaled 2,500 acres. Assumed yields of 140 bushel per acre for corn, 45 bushels per acres for soybeans (both full season and double crop), 65 bushels per acre for wheat, and 900 lbs. of cotton per acre.
Assumptions for 2016: You crop mix was comprised of 500 acres of corn, 700 acres of full season soybeans, 650 acres of wheat, 650 acres of double crop soybeans, and 650 acres of cotton. Average price per bushel sold equals $3.50 for corn, $10.00 for soybeans, $5.00 for wheat, and $0.70 per lb. for cotton. Operating expenses are from the 2016 UT Extension Crop Budgets. Other operating income and expenses were provided by the instructor. Total acres farmed equaled 2,500 acres. Assumed yields of 140 bushel per acre for corn, 45 bushels per acres for soybeans (both full season and double crop), 65 bushels per acre for wheat, and 900 lbs. of cotton per acre.
Use the above information to answer the following questions:
1. Over the past three years, what has happened to net farm income? Give three specific contributing factors as to why net farm income is on an increasing or decreasing trend.
2. Over the past three years, how have inventory changes, i.e. accrual adjustments, impacted the net farm income each year? What account changes had the largest impact? *Hint: Remember that accrual adjustments serve to reconcile all revenue and expense items to the time frame to which they belong. The net result of all accrual adjustments will directly impact net farm income.
3. As the farm manager, what crop has been the most profitable for your operation? You will need to review the gross revenues for each crop and the expenses that are listed in the “AGEC 465 Project Supplement” to answer this question.
Part 3: The Projected Income Statement (30 points: 10 points per question)
You are to complete the file “AGEC 465 Projections for 2017”. You are given the expense and acreage for each crop that you intend to plant in the file titled “AGEC 465 Project Supplement”. Use this information to complete the Projected Income Statement for 2017. There are some expenses that are already given to you. Your rent expense will be calculated by using the rent expense per acre that is given to you multiplied by the amount of acres you rent. *Hint: You know total acres farmed and the amount of land that you own. Assumed yields of 135 bushel per acre for corn, 45 bushels per acres for full season soybeans, 35 bushels per acre for double crop soybeans, 65 bushels per acre for wheat, and 900 lbs. of cotton per acre.
After completing the projections, answer the following questions:
1. Based on these projections, do you anticipate earning a positive or negative net farm income?
2. What factors contributed to either your operation earning a positive or negative net farm income?
3. What could you change for the 2017 crop year to improve the farm’s profitability for 2017?
Part 4: The Marketing Plan (30 points; 10 points for crop production, 3 points for each contract type, and 5 points for storage question)
You have your crop mix for the 2017 crop year along with your expected yields. Calculate your total production for each crop. (2.5 points each)
Total Corn Production: __________
Total Cotton Production: __________
Total Soybean Production: __________
Total Wheat Production: __________
You will need to look at the following list and describe how many bushels you plan to commit to each contract. Detail the advantages and disadvantages to each contract. (15 points total; 3 points each)
Forward Contract:
– How many bushels?
– Advantages of Contract:
– Disadvantages of Contract:
Basis Only Contract:
– How many bushels?
– Advantages of Contract:
– Disadvantages of Contract:
Min-Max Contract:
– How many bushels?
– Advantages of Contract:
– Disadvantages of Contract:
Deferred Pricing Contract:
– How many bushels?
– Advantages of Contract:
– Disadvantages of Contract:
Hedge to Arrive Contract:
– How many bushels?
– Advantages of Contract:
– Disadvantages of Contract:
How would grain storage alter your contract choices? (5 points)
Part 5: The Financial Analysis (30 points; 10 points for each question)
You will need to open the file “AGEC 465 Financial Ratios Report”. Review the financial ratios of the operation and answer the following questions. You will need to evaluate the ratios for 2016.
1. Is the farming operation’s current liquidity ratio strong or weak? What factors have had the largest impact on this ratio? Is it a price issues, a debt issue, or an expense issue? *Hint: Look at the operations current assets and current liabilities to answer this question.
2. Is the farming operation’s farm debt to equity ratio strong or weak? What factors have had the largest impact on this ratio?
3. Is the repayment capacity of the farming operation strong or weak? What factors have had the largest impact on this ratio?
Part 6: The Decision (40 points; 10 points for each question)
In the overview section, your operation was seeking financing for a new cotton picker purchase. You will need to open the file “AGEC 465 Loan Proposal”. This file contains two separate cash flows. The first cash flow contains projections for 2017 that does not include a new cotton picker purchase. The second cash flow contains projections for 2017 that includes the financing of a new cotton picker.
You are to now act as the loan officer. All loans have to approved based on the bank’s credit policy. Lenders look beyond just the profitability of a farming operation. Banks looks at the cash flow of the farm, the liquidity, the solvency, and historical financial performance to determine whether a loan is approved or not. The following are underwriting parameters for the bank that Mr. Shelby works for:
– Cash Flow Ratio: Look at the operation Term Debt Coverage Ratio. A term debt coverage ratio of 1.25 or greater is deemed to be a strong borrower. A term debt coverage ratio of 1.10 to 1.25 is deemed to be adequate. A term debt coverage ratio below 1.10 is deemed to be a weak borrower.
– Liquidity Ratio: Look at the operations Current Ratio. A liquidity ratio of 2.00 or greater is deemed to be a strong borrower. A liquidity ratio between 1.00 and 2.00 is deemed to be adequate. A liquidity ratio below a 1.00 is deemed to be a weak borrower.
– Leverage (Solvency) Ratio: Look at the operations Debt to Equity Ratio. A debt to equity ratio of 0.43 or lower is deemed to be a strong borrower. A debt to equity ratio between 0.44 and 1.50 is deemed to be adequate. A debt to equity ratio above 1.50 is deemed to be a weak borrower.
1. If you were the lender, Mr. Jeff Shelby, would you approve or deny the loan?
2. Why did you approve or deny the loan?
3. Step back into the farmer’s shoes, how could you improve the farm to better perform financially?
4. What part of this farm makes it successful? What decisions led to failure within the operation?
