Capital Turnover Ratio

[tweety]

What does the number on the vertical axis represent?

Gross revenue divided by capital assets.

[tweety]

good question.
Gross revenue is pretty easy.
capital asset value can mean different things. depending on if you are using
book value or
fair market value or some blend of the two.
$1 dollar of assets producing $1 dollar of gross revenue would give you a ratio of 100.
the ratio change year over year shows what direction productivity is heading. so its going down indicating you'll need more and more dollars of assets to maintain gross revenue.

my understanding of it anyways

Terry said what happens is as the curve goes down, the asset rich cash poor model gets worse and worse. Old money eventually runs out because there is often the assumption the farm is profitable and sustainable.

He also had a chart of the top producers (long term solid farms) in the presentation and the trend of the curve was exactly the same, only a bit taller bars. It's unlikely grain prices will rise, if anything, go the other way. A chart of raw agricultural since farming is more then just grain. However, the ratio does not follow the price. So its obvious it's the denominator that's the issue.



On the plus side, most here don't farm in the US https://data.ers.usda.gov/reports.aspx?ID=17838 https://data.ers.usda.gov/reports.aspx?ID=17838

[Hamloc]

Gross revenue divided by capital assets.

Ok if that is the case gross revenue would have to far exceed capital assets. Does that mean land value is not included? I don't believe anywhere in western Canada the gross revenue of a quarter would exceed its value on a yearly basis, certainly could be wrong.

[Taiga]

I assume those are percentages (not labelled). Or am I the only one less than 1 when I do my math.

[jazz]

A 1/3, 2/3rds rotation - (low ball pulse crop, followed by a cereal and then 3rd year cover crop/chem fallow) - would make just about the same money as a regular rotation with a fraction of the risk.

Prove me wrong.

I swear to JHC there are some guys just building land bases off lax FCC policies using crop insurance as a payment backstop. I mean worse comes to worse, crop insurance should make your land payment.

[farming101]

Gross revenue divided by capital assets.

Thanks.

So just for example, say a farm with 10 M in assets grosses 2M. It operates with no debt.
The ratio would be 20 or actually 20% (.20) if I understand the chart right.

Without any other info it might be assumed that a farm grossing 2M with no debt and a bunch of free cash is not in any trouble whatsoever.

I find it hard to believe that in 2009 the farms in the dataset averaged over 175% of their assets as gross income.
Say the farm above was worth 4 million in 2009 because of changes in land, machinery and building valuations. That would mean it grossed 7.5M?

Could it be that what is being portrayed is net assets? I mean asset value less debt on assets? No that doesn't make any sense either.

[jazz]

Say the farm above was worth 4 million in 2009 because of changes in land, machinery and building valuations. That would mean it grossed 7.5M?

On my farm the current value of the land way outstrips its productive value. I have had so many crazies come in here and bid the price through the roof and in large blocks too.

So much so that if I sold a quarter, I would make as much owning some dividend stocks sitting on my azz as I would running over the acres. I could probably take a jumbo line of credit off everything and stick it in the stock market and rent the rest out and make the same money as running the acres.

[farming101]

On my farm the current value of the land way outstrips its productive value. I have had so many crazies come in here and bid the price through the roof and in large blocks too.

So much so that if I sold a quarter, I would make as much owning some dividend stocks sitting on my azz as I would running over the acres. I could probably take a jumbo line of credit off everything and stick it in the stock market and rent the rest out and make the same money as running the acres.

Happening everywhere.
So without doing anything the capital turnover ratio is going to nosedive because the land has gone way up in value.
In the WP article Mr. Betker writes it would be better if the trendline was increasing. How in the world would that happen with the appreciation in land values alone since 2009?

[tweety]

Don't read the left side as direct. It takes what it was in 2008 and makes that 100%. As time moves right, what is happening to the ratio? Going up (good) or down (bad)?

Kinda like a yield chart, the check is 100 - doesn't mean it yielded 100 bu/acre. Typical turnover is 25%. so if you have 2 million in assets, it should generate at least 500k.

So if you choose to buy a 500,000 combine and a 350,000 seeder, instead of a 100,000 dollar combine and 50,000 seeder that could of done the job, your ratio is now 18.5%. 500k/2.7m*100.

Rented farms have higher asset ratios, but also higher operating expense ratios.

[farming101]

Don't read the left side as direct. It takes what it was in 2008 and makes that 100%. As time moves right, what is happening to the ratio? Going up (good) or down (bad)?

Kinda like a yield chart, the check is 100 - doesn't mean it yielded 100 bu/acre. Typical turnover is 25%. so if you have 2 million in assets, it should generate at least 500k.

Thanks. That makes a lot more sense to me now.

[rumrocks]

Don't read the left side as direct. It takes what it was in 2008 and makes that 100%. As time moves right, what is happening to the ratio? Going up (good) or down (bad)?

Kinda like a yield chart, the check is 100 - doesn't mean it yielded 100 bu/acre. Typical turnover is 25%. so if you have 2 million in assets, it should generate at least 500k.

I think your too high on the 25% unless you also have oil revenue.

[tweety]

I think your too high on the 25% unless you also have oil revenue.

Well it wasn't 5 years ago

And if it isn't today, time to look closer at what you're doing.