The average net farm income of Illinois grain farms was above average in 2020, mainly due to two factors: 1) rising corn and soybean prices in the second half of 2020, and 2) federal assistance via the Coronavirus Food Assistance Program (CFAP) and the Payment Protection Program (PPP). Despite higher net farm income, farmers did not increase family life compared to 2019. Instead, capital purchases were above average and working capital increased.
Net agricultural income 2021
Figure 1 shows the average net farm incomes of Illinois grain farms enrolled in the Illinois Farm Business Farm Management (FBFM) program from 1996 to 2020. The number of farms included in these averages varies by year. In 2020, more than 2,100 farms were included in the averages. The average farm size was 1,300 acres; however, there is a considerable range of sizes ranging from farms under 500 acres to farms over 15,000 acres.
In 2020, the average net farm income of these farms was $ 256,000 per farm, which is significantly higher than the average net farm income of $ 78,000 from 2014 to 2019. From 2014 to 2019, corn and soybean prices were much lower than during the period of expanding domestic ethanol production and increasing export demand from 2006 to 2013. From 2006 to 2013, net farm income averaged $ 189,000. In 2020, net farm income was above the 2006-2013 average and was the third highest in history, surpassed only by 2011 income of $ 274,000 and 2012 income of $ 298,000.
Corn and soybean prices were very low until August and then started to rise, improving grain sales performance expectations later in the year. For example, in the first week of August, spot prices in central Illinois averaged nearly $ 3.05 per bushel and $ 8.70 per bushel for soybeans. At the end of 2020, prices increased, reaching $ 4.75 for corn and $ 13.00 for soybeans. Higher prices, combined with above-trend yields on many farms, resulted in above-average crop incomes on most grain farms.
Additional government payments also increased income. In 2020, the administration introduced the Coronavirus Food Assistance Program (CFAP) to counter the negative impacts of the pandemic on global demand. In addition, many farmers have sought help from the Paycheck Protection Program (PPP) and Economic Disaster Assistance Loan (EDIL) offered by the Small Business Administration. These programs contributed about $ 74,000 to farmers’ income, or about 28% of income. Without these payments, revenues for 2020 would have been $ 182,000.
Uses of funds 2020
Although net farm income increased in 2020, farm families enrolled in Illinois FBFM did not increase family life on average (see Figure 2). Family life fell from $ 84,000 in 2019 to $ 81,000 in 2020, a drop of almost 3%. Overall, family life has increased over time at a rate of around 2.8% per year and is relatively stable from year to year. The 2020 drop could be due to economic uncertainties introduced by Covid-19, as well as activity limitations associated with pandemic measures.
The 2020 Supplementary Income has mainly been used in two ways. First, capital expenditures for machinery and buildings increased from $ 141,000 in 2019 to $ 164,000 in 2020, a 16% increase (see Figure 3). Capital spending reached record levels in 2020, surpassing the previous high of $ 155,000 in 2013. Overall, capital spending is correlated with net farm income (correlation coefficient 0.64), and the High income in 2020 contributed to record capital spending. This suggests that the farmers used part of the additional income to build and / or maintain the asset base of their farming businesses.
Farmers have also improved their working capital. One measure of working capital is the current ratio, which is equal to current assets divided by current debt. Ratios above 2.0 are generally considered to provide adequate working capital for emergencies or economic opportunities. Values below 1.0 indicate that the business does not have enough funds to cover its current obligations, which is usually a troublesome indicator for the farming business. The current ratio has increased from 2.03 in 2019 to 2.42 in 2020, an increase of 19% (see Figure 4). The 19% increase was the largest since 1996, when consistent measures of the current ratio began.
On average, current liabilities did not decrease between 2019 and 2020. Instead, current assets increased, with around 40% of the increase coming from cash and cash equivalents, and the remaining 60% from the increase concerned the value of grain stocks. Much of the increase in grain stocks is due to rising grain prices, which may not continue in the years to come. Still, working capital has increased significantly for 2020.
Implications for 2021
In general, farmers used the high net farm incomes in 2020 to improve the financial position of their farming business by 1) building the asset base through capital purchases and 2) improving working capital. In contrast, farms did not, on average, use the increase in income in 2020 to finance increased living expenses for families.
Net farm incomes are likely to be higher again in 2021. History suggests that the increase in capital spending is likely to continue in 2021 and that working capital will increase further.