Capital Turnover Ratio

[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.

[AlbertaFarmer5]

This is likely a reasonable measure for most operations.
But, if an established farmer who doesn't buy any new land, or even possibly machinery, Could have constant income and be in great financial shape, but because the valuation of his ( or hers) land has gone up, the ratio goes down, even though, on paper, he has made even more than the beginning of the period due to the land appreciation.

Just not sure why this measure is the most relevant. It would be interesting to see the chart extended back another cycle or two.

[tweety]

....Could have constant income and be in great financial shape, but because the valuation of his ( or hers) land has gone up, the ratio goes down, even though, on paper, he has made even more than the beginning of the period due to the land appreciation.

...

Perfect for the farmer talking to Ritchie Bros. Not so much for one wanting build a business. Big difference. And that is exactly what the ratio means. How many $ in assets does it take to make a buck. Once that number gets below .15 or so, you risk losing it all especially since farming has considerable risk from all sides.

The chart is basically saying - watch that spending right now because the turnover ratio is low and trending lower. Some times you just have to look past the myriad of meaningless details you try to over analyze and look at the big picture.

[Hamloc]

Well it wasn't 5 years ago

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

Tweety where I live 3 quarters of land puts you over $2 million in assets and 3 quarters of land are not going to produce $500000 in gross returns no matter what I grow. Does this mean I have to move to where land is cheaper? And where in western Canada would that be? According to my math land would have to be worth just over $1000 an acre for this to work and that is farming it with my equipment that the majority of is 10 years old and older.

[tweety]

Tweety where I live 3 quarters of land puts you over $2 million in assets and 3 quarters of land are not going to produce $500000 in gross returns no matter what I grow. Does this mean I have to move to where land is cheaper? And where in western Canada would that be? According to my math land would have to be worth just over $1000 an acre for this to work and that is farming it with my equipment that the majority of is 10 years old and older.

All it means is land is overpriced for the revenue it can generate. Eventually you may not be able to afford the taxes because the value is so high. How will the next generation pay you for it while farming it? Remember the ratio is about the ability of the assets to produce cash - that's it!!!!! What it is saying is you should sell that land and buy something with a much higher ratio.

The ratio doesn't try to define the philosophy of why you farm or should farm, or sell or..., only the ability to generate revenue based on capital asset value. And is an indicator of overall finances. It's a tool. Not the whole toolbox.

[bucket]

These things confuse me....so if I can still produce a good crop at reasonable prices and my land value goes down. ...the indicators are better?

Some have said I should be spending more on inputs but when I say the net return isn't there ...I get a blank look

[Hay Farmer]

GARS always says that spending more on the crop, on average, nets the farmer more according to their clients. I just don’t see how blanket spraying every acre, multiple times a year nets better in the end.