Inter-Relationships Between Financial Ratios For Summer Crop Producers: A Note

A principal component analysis of financial ratios showing farm solvency, liquidity, profitability, efficiency and debt servicing ability is studied for 1 836 summer crop producers. More highly leveraged farmers had high overdraft to net worth and low discretionary income to own capital ratios. They seemed to rely on short-term debt, in particular, to fund operations. Alternatives to short-term debt for managing liquidity - such as cost savings, diversification and asset and debt restructuring - could therefore be investigated by farmers and policy-makers. Lenders and co-operative advisers should emphasise to clients that fixed charges associated with higher leverage increase the potential for lower returns to own capital when events such as drought reduce cash inflow or rising interest rates increase cash outflow. Farmers with high operating ratios also had high debt ratios. Improved operational efficiencies through cost savings may therefore reduce reliance on debt financing. Less solvent producers had asset structures with relatively higher proportions of medium-term assets. Accelerated depreciation allowances could have encouraged debt financing of medium-term assets or over-investment in medium-term assets, which reduces liquidity and increases debt use. The impact on asset investment decisions and farm liquidity of recently announced changes to these depreciation allowances needs investigation by policy-makers.