How Financial Liquidity Helps Farms Perform in Tough Times

Corn and soybean prices have declined from historical highs in 2022 to long-run normal levels. (See: farmdoc daily May 31, 2022) After crop prices experienced a similar decline between 2012 and 2014, grain farms in the Corn Belt went through an extended period of low or negative net farm income. During this period, many farms covered losses by drawing down working capital, assets like cash or grain inventories that can be liquidated quickly to meet expenses. The liquidity provided by working capital allows farms continue operations in the face of losses, for example, by allowing them buy inputs necessary to plant the next year’s crop. Looking ahead, University of Illinois farmdoc crop budgets for 2025 point to negative returns for corn and soybean farms. (See: farmdoc daily September 24, 2024) Should low returns persist, farmers may experience financial challenges similar to what they experienced post-2014. Grain farms in the US Corn Belt have built liquidity. However, liquidity may differ widely across farms (See: farmdoc daily December 12, 2024). In particular, younger farmers may be less liquid and therefore more exposed to economic downturns. Understanding the link between farm liquidity and business performance is key to weathering the possible downturn in the farm economy that lies ahead, especially if that downturn extends for multiple years. This study analyzes the association between working capital built by farms up to 2014 and farm business performance during the subsequent low-price years from 2015-2018. Using data from Illinois FBFM, we follow the same farms over time. While profitability per acre varies widely across farms in our data, there are some economically meaningful differences in net farm incomes by baseline liquidity position. High liquidity farms tend to achieve better subsequent returns in difficult times, although there is some evidence that having very high liquidity levels is not associated with better performance.