Corn+Soybean Digest

The Economics are Changing: ROA

This column’s title is a quote from my business associate, Alicia Morris, as both of us quickly glanced at a FINBIN data summary based upon farm management instructors’ customers in Minnesota. Boy, was Alicia correct in her quick observation! I will break down this data to assist you in benchmarking your financial ratios with peers, which is a critical tool for farm and ranch business success.

For reference, this data summary includes over 2,000 livestock and crop producers. No, this is not a good representation of the average producer in the U.S., but probably the upper two-thirds, which are those with initiative to maintain and use records in business decision making. FINBIN data sets go back a number of decades so one can get a good historical perspective. Also the instructors work closely with producers to obtain accurate and complete data, so the quality of information is high.

Returns are Down
Return on assets (ROA) is a financial metric of business success. This measure is calculated by dividing net income before depreciation and interest into assets on a cost basis. The top 20% of producers’ ROA was approximately 11%, down from 16-19% over the past four years. The average producer’s return was approximately 4%, dramatically down from the 11-14% range. The low 20% of producers’ ROA was -7%. A steady declining trend in ROA was observed with this group starting in 2007, but it has accelerated in recent years.

The bottom line regarding ROA is that profits are down among all three stratifications, but the decrease is most noticeable in the average and below average groups.

Next time I will discuss margin and coverage ratio.

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]

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