APPENDIX


How to use the tables

The tables can be used as a measure of comparison for individual farming operations or farms on an aggregate basis. For example, an operator of a grain farm with 1,000 acres can compare their financial performance with other farms in column 4 (2005) of Table 5, the 901 to 1,200 acres range for grain farms. If the farm's operating expenses to VFP ratio is 68.5% and the average ratio is 68.2%, the operator would conclude his or her grain farm operation was slightly more efficient with operating expenses than the average grain farm in 2005. Likewise, if the farm's profit margin ratio fell between 14.2% and 23.0%, the operator would have a profitability ratio greater than 50% of grain producers, but less than 25% of the grain producers of that size.

A lender could review the financial performance of a borrower with 700 tillable acres and a 20% tenure ratio. The lender may compare the asset and debt structure of his or her borrower's farm to other farms in column 3 (2005) of Table 5, the 601 to 900 acre grain farm class and column 2 (2005) of Table 10, the 11 to 25% tenure ratio group. A lender could also determine if the farm's financial ratios are above or below the averages of other farms with similar characteristics.

Educators and research analysts could use these tables to measure farms on an aggregate basis to determine trends in the industry. For instance, how does increasing debt to asset levels effect farm profitability? As farm size increases, does farm profitability as a proportion of VFP increase or decrease? What characteristics are different between farms with less than $20,000 in net farm income from operations and farms with more than $100,000 in net farm income from operations?


Limitations of the tables

Caution should be used when analyzing one farm's financial performance against this report. One financial characteristic does not completely categorize the financial performance of a farmer. These figures are averages of 2,599 farms from Illinois and are not industry norms, lender standards, nor producer goals. For example, a 500 tillable acre grain farm may have a debt to asset ratio of 50%. This level of debt is above the 75% quartile of column 2 (2005) on Table 5 of 36.1%. A 50% debt to asset ratio is a high level of debt for a farming operation, but one should also consider tenure position, profitability, and asset size before being critical of this farming operation.

A farming operation may also be affected by extraordinary circumstances such as a local drought when crop conditions were generally favorable across the state for that year. Thus, a farm's profitability ratio may be in the bottom 25% quartile that year due to the drought and not the farmer's management ability.